Mike Segar/Reuters
- Large-cap long-only funds are the most underweight in financial stocks in nearly a decade as firms trade profits for loan-loss protections, Bank of America said Friday.
- Hedge funds made similar retreats, reaching record-low positioning in the sector last month and only barely ticking higher through May.
- Fund concentration in major tech names continued to swell, the firm said. Long-only funds notched another record-overweight positioning in the communication services sector in May.
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Funds were running from financial stocks before the coronavirus hit, and the pandemic has only accelerated the sector’s outflows, Bank of America said in a Friday note.
Large-cap long-only funds are the most underweight in financial stocks in nearly a decade, according to the firm, retracing a minor uptick made after the 2016 election as firms stockpile cash for increasingly risky loans. Hedge fund positioning in financials plunged to a record low last month and barely ticked higher through May, the bank’s analysts added. Only the energy and real estate sectors hold a smaller share of hedge funds’ interest.
Financial stocks have rallied alongside other slammed names as investors grow more optimistic toward economic reopening. The assets could become a “pain trade” for fund managers if their outperformance continues, Bank of America said. The firm maintains its “overweight” rating on the sector.
Bank of America
While weighting in financials slumped in recent weeks, investors continued to pile cash into major tech names. FANG stocks — Facebook, Amazon, Netflix, and Google — saw interest from long-only funds continue to grow. Such managers now sit 58% overweight on FANG compared to the S&P 500, according to the analysts.
While tech names have broadly outperformed through the market’s recent rally, Bank of America warned of their overcrowding both within and across funds. FANG alone makes up 10% of the S&P 500, and the corresponding communication services sector reached another record-overweight positioning in long-only funds in May.
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