Goldman Sachs analysts recently looked at what hedge and mutual funds bought in the first quarter. Both fund types sold their positions in financials, and rotated into more defensive equities. Goldman Sachs found nine “shared favorites” among the stocks hedge and mutual funds bought. Late last week the S&P 500 briefly touched its highest price since last August, capping a stunning rally that’s seen the index rise by 11.3% year-to-date.
But hedge funds and mutual funds have lagged the broader market this year. In a recent note to clients, Goldman Sachs analysts led by chief US equity strategist David Kostin found that, “the average equity long/short hedge fund has returned 3% YTD and the average large-cap core mutual fund has returned 7%.”
The problem is that most of those funds aren’t exposed to the stocks leading the market higher. Specifically, the seven largest tech stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta — which have returned 53% year-to-date, while the other 493 stocks in the S&P 500 have returned a whopping 0%, according to Goldman Sachs.
Although hedge funds and mutual funds may be trailing the market for the moment, don’t count them out just yet. It pays to pay attention to where the biggest brains on Wall Street are investing, and Goldman Sachs has outlined exactly where those fund managers moved their money in the first quarter of the year.
Here’s what hedge funds and mutual funds are buying, and why investors may want to steal a page from their playbook.
What sectors are funds investing inMissing out on the tech rally over the last few weeks was mostly a matter of bad timing on the part of hedge funds and mutual funds. According to Kostin, in the first quarter “hedge funds cut their exposure to Info Tech by 538 bp and became incrementally more underweight in 10 of the 12 subsectors relative to the Russell 3000.” Meta, Apple, and Microsoft saw some of the largest net decreases in hedge fund ownership.
That said, it seems like hedge funds have recognized their mistake, and the seven largest tech stocks “accounted for 10% of hedge fund long equity assets at the start of 2Q 2023, the largest share since at least 2007,” Kostin wrote. Nvidia was among the tech, media, and telecom stocks with the biggest amount of buying.
Mutual funds also cut their exposure to tech in the first quarter, though Kostin noted that this was partially due to the tech sector’s reorganization and the re-classification of stocks like Mastercard and Visa as financials. “Within the sector, funds added to Semiconductors (+14 bp) and reduced IT Services (-82 bp),” Kostin wrote.
While AI hype is dictating the market’s direction for the moment, earlier this year it was the banking crisis dominating headlines and investing decisions alike.
Both hedge funds and mutual funds cut their exposure to financials sector in the first quarter as the crisis played out, though by different degrees — hedge funds are underweight the sector, but while mutual funds sold out of the sector it remains the largest overweight among that type of fund.
“Hedge funds and mutual funds reduced holdings in regional banks, especially relative to the Globally Systemically Important Banks (GSIBs),” Kostin wrote. “However, hedge funds also took the opportunity to add exposure to large-cap institutions like JPM, which joined the VIP list this quarter, SCHW, and BLK.”
Beyond financials and tech, hedge funds and mutual funds moved in tandem across the rest of the market, turning their attention to defensive equities. “Hedge funds and mutual funds both increased net tilts in Healthcare, Consumer Staples, and Utilities,” Kostin wrote. “Both also cut exposure to Info Tech, Consumer Discretionary, and Communication Services. Healthcare replaced Info Tech as the largest sector net exposure for hedge funds.”
The stocks that funds love right nowMirroring the investment strategies of hedge funds and mutual funds is one way to invest, but homing in on where their investments overlap may be a smarter strategy.
Goldman Sachs analysts delved into “740 hedge funds with $2.2 trillion of gross equity positions ($1.4 trillion long, $779 billion short) and 506 core, growth, and value mutual funds with $2.6 trillion of AUM” to analyze their investments at the beginning of the second quarter, Kostin wrote.
Among all of those funds, Goldman Sachs found there were nine stocks that they deemed “shared favorites” between two different Goldman Sachs indexes.
The first index is the Hedge Fund VIP List, a basket of “the positions that appear most frequently among the top 10 long equity holdings within the portfolios of fundamentally-driven hedge fund managers,” according to the Goldman Sachs site. And the second is the Mutual Fund Overweight Positions index, a basket of stocks that the average large-cap mutual fund is most overweight in.
And while these investments may be trailing the S&P 500 at the moment, hedge fund and mutual fund favorites have a tendency to beat the market.
“Shared favorites have lagged the S&P 500 by 4 pp YTD (8% vs. 12%) but has a strong track record of outperformance,” Kostin wrote. “An equal-weighted list of shared favorites has generated an annualized return of 14% vs. 13% for the S&P 500.”
The nine stocks below are the favorite investments among both mutual funds and hedge funds alike.