Hedge and mutual funds rotate from tech; see the stocks they love and shun

Hedge funds and mutual funds raised and broadened market exposure in the second quarter, according to the latest analysis from Goldman Sachs.

Goldman analyzed 744 hedge funds with $2.4T of gross equity exposure and 528 mutual funds with $2.8T in assets under management.

“Our research shows that the typical S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) stock has been more micro-driven in the last six months than at any time since 2017, driven by falling stock correlation,” strategist David Kostin wrote in a note. “A more micro-driven market has typically been associated with more opportunity for stock pickers to capture alpha.”

“For example, hedge fund returns have historically been more positive when stock returns are more micro-driven.”

“Hedge funds and mutual funds rotated into cyclicals at the expense of growth sectors like Info Tech (XLK) and Consumer Discretionary (XLY),” Kostin said. “Earlier this year, the seven mega-cap tech stocks lifted the S&P 500 in an extremely narrow rally. Returns have since broadened out and funds cut exposure to the two sectors.”

“Hedge funds and mutual funds both entered 3Q with largest Info Tech underweight since at least 2012.”

Just six stocks overlap as favorites that appear in the Goldman Very Important Positions list for hedge funds and its mutual funds overweight list.

Those stocks are:

1. Cigna (CI)
2. Fiserv (FI)
3. Mastercard (MA)
4. Uber (UBER)
5. Visa (V)
6. Workday (WDAY)

“CI is the only new shared favorite this quarter,” Kostin said. “Three of the stocks are Financials (XLF) and the other three are from Health Care (XLV), Info Tech (XLK), and Industrials (XLI).”

“The median shared favorite trades at a 58% NTM P/E premium to the median S&P 500 stock (27x vs. 17x). Shared favorites have lagged the S&P 500 by 1 pp YTD (14% vs. 15%) but have a strong track record of outperformance.”

Among the out-of-favor, 21 stocks appear on the Very Important Shorts list for hedge funds and the mutual funds underweight list.

Those are:

1. AbbVie (ABBV)
2. Caterpillar (CAT)
3. Costco (COST)
4. Chevron (CVX)
5. Disney (DIS)
6. Ford (F)
7. Home Depot (HD)
8. IBM (IBM)
9. Intel (INTC)
10. Illinois Tool Works (ITW)
11. J&J (JNJ)
12. McDonald’s (MCD)
13. Moderna (MRNA)
14. PepsiCo (PEP)
15. Pfizer (PFE)
16. P&G (PG)
17. AT&T (T)
18. Thermo Fisher (TMO)
19. Tesla (TSLA)
20. Walmart (WMT)
21. Exxon Mobil (XOM)

Looking to divergence, there are six stocks where mutual funds are overweight but hedge funds are shorting:

1. Bank of America (BAC)
2. Comcast (CMCSA)
3. Intuit (INTU)
4. Schwab (SCHW)
5. UnitedHealth (UNH)
6. USB (USB)

“Despite the rotation away from tech at the macro level, hedge funds continued to lift exposures in select tech stocks,” Kostin said. “Hedge funds carried a record long portfolio weight in mega-cap tech during 2Q and the group remains atop the list of the most popular hedge fund long positions.”

The stocks where hedge funds are significantly long but mutual funds are underweight are:

1. Apple (AAPL)
2. AMD (AMD)
3. Amazon (AMZN)
4. Broadcom (AVGO)
5. Boeing (BA)
6. Berkshire Hathaway (BRK.B)
7. Alphabet (GOOG) (GOOGL)
8. Eli Lilly (LLY)
9. Meta (META)
10. Microsoft (MSFT)
11. Nvidia (NVDA)