NYSE trader worried

Summary List Placement

Like customers at an Apple store on the day a new iPhone is released, fund managers have crammed into large-cap tech stocks over the last six months as the world became reliant on work-from-home infrastructure.

In fact, 74% of hedge and mutual fund managers said in a recent July Bank of America survey that being long on large-cap tech stocks was the most crowded trade — the highest percentage in the survey’s history.

But as it turns out, that may have to change, at least for diversified mutual fund managers. It is not because of shaky fundamentals and investor exuberance, but because of Securities and Exchange Commission rules.

According to a September 10 note from Goldman Sachs, the valuation surges of companies like Amazon, Facebook, Microsoft, Apple, and Alphabet may have unwittingly put some fund managers in violation of SEC regulations.

The Investment Company Act of 1940 mandates that mutual funds labeled as “diversified” have no more than 25% of their portfolios made up of positions in individual securities that each exceed 5% of their assets.

Yet, that became the case for several diversified mutual funds as tech-stock valuations soared, Goldman Sachs found. For example, growth-fund managers are facing a situation where Apple, Microsoft, and Amazon now make up more than 5% of the Russell 1000 Growth Index’s market cap and collectively add up to 30%. This makes it challenging for managers to hold weights that are benchmarked to the indexes.

“Based on the most recent fund holdings data, 43 large-cap growth managers with $300 billion in AUM identify as ‘diversified’ but would currently fail the SEC’s limitations to register as a ‘diversified’ fund,” Goldman Sachs’s Chief US Equity Strategist David Kostin said in the note. “The average fund in this list holds 32% of its portfolio in individual …read more

Source:: Business Insider


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