* Shifting allocations closer to benchmark
In the first quarter, the active share ratio — which measures how far fund managers are
deviating from their benchmark — fell for the first time in ten months and by the biggest
amount since 2011 (Chart 4). Similarly, managers also moved their sector weights
closer in line with the benchmark, with the exception of Tech and Staples. For Tech,
the average fund’s overweight was little changed versus last quarter and close to
where it bottomed in 3Q14. In contrast, funds are now more underweight Consumer
Staples than since 2011. We also note that, while still modestly underweight the
Financials, funds are the most exposed to the sector than they have been since 2009.
* Even the crowded trades got a bit less crowded
Of the ten most overweight industries from last quarter, all but Auto Components
moved closer to the benchmark weight, leaving Auto Components the most
overweight industry of note. While some investors have grown concerned about
crowding within high-growth Tech, the most crowded “Tech” stocks are not in the Tech
sector: Biotech (Health Care) and Internet & Catalogue Retail (Discretionary). At the
stock level, funds took down their relative weight in the most overweighted stocks for
the first time since 3Q13.
* That’s what happens when uncertainty picks up
The move closer to benchmark weights may be a reflection of diminished fund manager
conviction as the level of perceived macro risk appears to have risen. The start of the
first Fed tightening cycle in nine years may be less than three months away, and Greece
continues to flirt with default. As a result, investors appear to have lowered equity
allocations, raised cash levels and taken out more downside protection
* No love for Big, Old and Ugly
Fund managers continue to underweight high quality mega-cap stocks, particularly
those with foreign exposure. For the top five S&P 500 stocks by market cap, active
funds are underweight by 36%, which is the most since 2013. And of the top ten
stocks by market cap, fund managers are underweight all but two (WFC, JPM).
Funds are also underweight the highest quality stocks and overweight the lowest
quality stocks, and have smaller exposure to foreign exposure.