This is just getting comical.
Last week, in “Here’s Why Equity Hedge Funds Had Their Best Start To A Year Since 2009,” we brought you the latest from Goldman’s quarterly hedge fund monitor and we weren’t surprised to learn that the “2 and 20” crowd’s half-decent H1 performance had a whole lot to do with simply piling into info tech and sitting on it.
We’ve been over this time and again. In a world where benchmarks only rise on the back of the central bank liquidity tsunami, and against a backdrop characterized by relentless inflows into passive funds which by definition funnel money indiscriminately in order to replicate those very same benchmarks, active managers find it virtually impossible to generate alpha. Unsurprisingly, this started with the onset of QE.
So what do active managers do? Well, they simply overweight whatever it is that’s working, thus perpetuating the very same dynamic that killed their alpha in the first place, in a never-ending feedback loop that Howard Marks recently warned approximates the “perpetual motion machine” that helped catalyze the dot-com bust.
Ok, so with that in mind, consider that Goldman’s latest read on mutual funds shows that “large-cap funds have delivered solid returns YTD [with] the share of funds outpacing their benchmarks above the 10-year average and performance improving since early 2017.”
All told, “44% of large-cap core, growth, and value mutual funds have generated higher returns than their respective benchmarks YTD compared with an average of 37% since 2007.”
And you’ll never guess why. Here’s Goldman:
InformationTechnology has been the primary driver of above-average fund returns versus their benchmarks in 2017 (Exhibit 5). The average large-cap mutual fund is overweight Info Tech by 144 bp, the largest overweight across all sectors. Info Tech is also the best performing sector YTD, outpacing the S&P 500 by 13 percentage points (24% vs. 11%).
And the flows picture mirrors this lean as “technology equity funds have witnessed inflows of $8 billion YTD (the highest across all sectors) compared with $2 billion of outflows during full-year 2016.”
Meanwhile, Goldman has also taken a look at how funds are positioning for progress (or a lack thereof) on the Trump agenda.
The story there is pretty straightforward: funds are still expecting tax reform to pass in some form or another and they’re still pretty confident in the deregulation push…
… but the more telling chart is the following, which illustrates the change in positioning for those events from the start of the year:
Simply put: they’re pricing out the Trump agenda altogether with the sole exception of deregulation.
And so, what emerges from the above is that on the whole, mutual funds are bullish tech and bearish Trump.
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