Technology has been Wall Street’s biggest standout of 2017, accounting for nearly half of the overall market’s rise thus far this year. The biggest question for investors, then, is whether those gains are likely to continue.
As of right now, fund managers are split on the sector’s prospects.
“Both mutual fund and hedge fund returns in 2017 have benefited from high allocations to the information technology sector,” Goldman Sachs wrote on Monday, referring to its own data, which showed how tech stocks have single-handedly helped active managers outperform in 2017. However, “shifts in sector allocations during [the first quarter] suggest different expectations” for the future, the investment bank added.
“Although they remain overweight, mutual funds faded the tech rally,” wrote the team of Goldman Sachs Group Inc.
analysts, led by David Kostin, the firm’s chief U.S. equity strategist. “Managers reduced positioning in the sector to 133 bp (1.33%) overweight versus their respective benchmarks. However, hedge funds have continued to buy the rally. Hedge fund managers increased net positioning in Info Tech by 82 basis points, ending the quarter 352 basis points overweight relative to the Russell 3000 (25% vs. 21%).”
The tech sector, as measured by the Technology Select Sector SPDR ETF
is up more than 18% thus far this year, more than twice the 8.9% gain of the S&P 500
The gains have come on the back of strong outperformance by some of tech’s biggest names, including Apple Inc.
and Google-parent Alphabet Inc.
which is up nearly 26% in 2017, while the rest of have advanced more than 30%.
Some investors have raised concerns about valuations in the tech space. The tech ETF recently saw its biggest one-day outflow since January, while Apple received a rare analyst downgrade on Monday.
According to Thomas Lee, a managing partner at Fundstrat Global Advisors, the bullish view held by hedge funds may be the correct one.
“FANG usually builds on year-to-date gains,” he wrote, estimating that the group could rise another 20% to 40% in the second half of the year. “Given the substantial top-line and [earnings per share] growth, valuation risk/reward remains favorable.”
The term FANG refers to four stocks—Facebook, Amazon, Netflix, and Google—that are major players in the internet space (Amazon, while heavily connected to trends in the technology sector, is technically classified as a consumer-discretionary name given its online retail business.). Apple, which has more of a hardware focus, is sometimes included in such groupings (when the acronym is expanded to FAANG).
Outside of the technology sector, mutual funds and hedge funds have extremely different views on financials, according to Goldman’s analysis.
The financial sector “is the most underweight sector among hedge funds relative to the Russell 3000 (-500 basis points), but it is the second-most overweight sector in large-cap mutual fund portfolios (+198 basis points),” the firm wrote (emphasis in original). “The 4 percentage point difference in Financials’ allocation between mutual funds (14%) and hedge funds’ net exposure (10%) is second only to Materials, where mutual funds allocate 3% of assets compared with hedge funds’ 7% net weighting.”
While financials were the biggest gainers in the immediate aftermath of President Donald Trump’s election in November, those gains have stalled lately. The group is up less than 1% thus far this year.
The divergent views on financials are solidifying, the investment bank added. “Large-cap mutual fund managers (core, growth, and value) boosted their Financials’ overweight by 66 basis points vs. their respective benchmarks while hedge funds increased their underweight by 52 basis points (relative to the Russell 3000).”