Goldman Sachs analysts Amanda Sneider, David J. Kostin, Stuart Kaiser, Ben Snider, Rima Reddy, and Aaron Woodside release their Mutual Fundamentals report, breaking down a vast amount of data into 12 key points. Below is an excerpt with a specific focus on large cap value mutual funds.

Our Mutual Fundamentals report analyzes the performance and positioning of 642 mutual funds with $1.7 trillion of assets under management. The majority of mutual fund holdings reflect positions between September and November 2013. We list 12 conclusions below.

Mutual fund flows favored equities over bonds in 2013

1. Bond funds reported $71 billion of net outflows for 2013, the first outflow since 2004. This compares with an average inflow of $300 billion per year since 2009. Outflows from bond mutual funds and ETFs started in June as tapering discussions began.

2. Equity funds reported inflows of $328 billion in 2013. However, US active equity funds received inflows of just $24 billion. The regional preferences of investors have become more global in recent years as investors look for diversification and stronger growth abroad. While equity flows still favored international equity ($204 billion) over domestic equity ($124 billion) in 2013, domestic equity funds recorded their first year of annual inflows since 2009. Purchases of domestic equity funds have largely favored ETFs over mutual funds. 80% of flows to domestic equity funds this year were through ETFs ($100 billion of $124 billion).

Large-cap core funds

3. Funds are most overweight Financials and underweight Utilities. Top average overweights include: JPMorgan Chase & Co. (NYSE:JPM), National-Oilwell Varco, Inc. (NYSE:NOV), CVS Caremark Corporation (NYSE:CVS), QUALCOMM, Inc. (NASDAQ:QCOM), and American Express Company (NYSE:AXP). Top average underweights include: Exxon Mobil Corporation (NYSE:XOM), Apple Inc. (NASDAQ:AAPL), AT&T Inc. (NYSE:T), General Electric Company (NYSE:GE), and Amazon.com, Inc. (NASDAQ:AMZN).

4. Since August, the average fund shifted allocations within its overweight sectors. Funds increased Financials and Consumer Discretionary allocations (led by American Express Company (NYSE:AXP), The Walt Disney Company (NYSE:DIS), Bank of America Corp (NYSE:BAC), and Comcast Corporation (NASDAQ:CMCSA) but decreased allocations to Health Care and Industrials.

5. The Financials sector represents the largest discrepancy between average and aggregate sector positioning. The average fund is about 100 bp overweight Financials while the aggregate fund is almost 100 bp underweight, which means the largest core funds are underweight. The largest discrepancy within Financials is in Insurance. The average fund is 83 bp overweight relative to the S&P 500 versus in line for the aggregate.

Large-cap growth funds

6. Growth was an unpopular style in 2013, and funds reported net outflows in most size categories. Yet 57% of large-cap core funds outperformed the Russell 1000 Growth benchmark in 2013.

7. The average fund is most overweight the Health Care sector (notably Biotechnology) and underweight Consumer Staples (Tobacco and Beverages). Over the last quarter, the average fund increased exposure to Health Care and Information Technology and decreased exposure to Financials and Energy.

8. The largest industry shifts were both in the Financials sector. Funds increased exposure to the Diversified Financial Services but reduced their Insurance overweight. Allocations to Consumer Finance also declined.

Large cap value mutual funds

9. The average large cap value mutual fund is over 300 bp overweight the Consumer Discretionary sector, a 12-month high. But some of the overweight may be a residual impact of the benchmark rebalance in July. Prior to the rebalance, the average fund was 150 bp overweight the sector. Overweight Discretionary stocks include Comcast Corporation (NASDAQ:CMCSA), Target Corporation (NYSE:TGT), and Macy’s, Inc. (NYSE:M).

10. The average large cap value mutual fund is underweight only three sectors: Financials, Utilities, and Energy. Consumer Staples and Telecom are underweight in aggregate.

Small-cap core funds

11. Small-cap core funds favor cyclical sectors such as Industrials, Materials, Consumer Discretionary and Energy. Overweight industries within Industrials include Machinery, Road & Rail, and Commercial Services & Supplies.

12. Underweight positioning in Health Care hurt performance during the year. The Health Care sector outperformed the Russell 2000 by 12pp during 2013. Biotechnology, the largest Health Care underweight, outperformed the benchmark by 18 pp in 2013.

large cap value mutual fund – 128 mutual funds; $328 billion AUM

Performance: 45% of funds outperformed the Russell 1000 Value in 2013, above the eight-year average of 38%. During 2013, the median mutual fund underperformed the Russell 1000 Value by 35 bp.

large cap value mutual funds: Holdings analysis of 110 large-cap value funds with $288 billion of assets under management. The top three funds represent $132 billion in total holdings (46% of AuM analyzed).

Timing: 76% of filings reflect positions between Sep 30 and Nov 30, 2013. Holdings analysis may be impacted by the benchmark rebalance in early July.

Flows: Large-cap value mutual funds reported outflows of $1.2 billion in 2013, but ETFs reported inflows of $4.5 billion.

Passive assets: Exchange traded funds are not included in our holdings and performance analysis. ETFs ($43 billion) represent 11% of large-cap value assets.

Distribution of 2013 performance

Allocation: Mutual funds invest an average of 75% of their common stock in Russell 1000 Value stocks. 19% is held in other US stocks, primarily members of the Russell 1000 Growth index. International stocks, including ADRs, represent 6% of common stock holdings: 4% Western Europe, 1% Canada, and 1% other. The average fund holds 3.1% of assets in non-stock holdings.

The Russell 1000 value index is the primary benchmark for 55% of funds according to Bloomberg. 33% list the S&P 500 and 2% list other large-cap value indices. The remaining 10% list other benchmarks.

Sectors: The average large cap value mutual fund is over 300 bp overweight the Consumer Discretionary sector, a 12-month high. But some of the overweight may be a residual impact of the benchmark rebalance in July. Prior to the rebalance, the average fund was 150 bp overweight the sector.

The average large cap value mutual fund is underweight only three sectors: Financials, Utilities, and Energy. Consumer Staples and Telecom are underweight in aggregate.

Mutual fund

Large-cap value – Company deviations from benchmark

large cap value

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