According to Goldman Sachs Portfolio Strategy Research, large-cap core mutual fund managers are currently favoring domestic cyclical sectors.
The August 20th report from Goldman Sachs Portfolio Strategy Research focuses on the geographic exposure of large-cap core mutual fund portfolios. GS analysts Amanda Sneider et al. note: “International equities account for just 4% of equity assets. Revenue exposure of fund holdings favor more domestically-exposed areas such as Diversified Financials (AXP and STT), Media (CMCSA and TWX), and Health Care Equipment & Services (MDT and ESRX). Holdings also favor cyclical over defensive areas of the market. Under our macro view, Cyclicals should outperform Defensives and firms with high domestic revenues should beat stocks with high non-US sales.”
Fund managers currently buying cyclicals, not defensives
In their analysis, the Goldman Sachs team plots S&P 500 industry groups across two major axes: cyclical vs. defensive and high domestic revenues vs. high non-US sales. They argue domestic cyclicals are most likely to outperform during the next year or so under a macro view assuming ongoing U.S. economic expansion, fed tightening, a strengthening dollar and continued low energy prices.
The report points out that large-cap funds are well positioned to benefit from a quickening economy given the average large-cap core fund is notably overweight domestic cyclicals and underweight the rest of market. Large funds are overweight all five domestic cyclical industry groups including stocks such as JPMorgan, Comcast Corporation, American Express, AIG and Union Pacific Corporation. In the second quarter of 2015, mutual fund managers increased their overweight positions in every sector except transportation.
Sneider and colleagues note that large-cap core funds are most underweight domestic defensives, in particular Telecom Services, Real Estate and Utilities. Of course, all three sectors are high-yielding, historically low return dispersion industries.
Goldman’s large cap mutual fund position baskets
The GS team has developed a pair of large cap mutual fund position baskets to give investors insights into the current investments of major fund managers. One basket is a portfolio of favored mutual fund positions (<Bloomberg ticker: GSTHMFOW>) representing 50 stocks where the average mutual fund is most overweight. The portfolio of out-of-favor mutual fund positions (<GSTHMFUW>) represents stocks where the average fund is most underweight. Of note, both baskets are biased towards large-cap. Also of interest, the overweight positions basket has a median market cap of $57 billion compared to $95 billion for the underweight positions basket ($18 billion for the S&P 500 index).