Big-money investors’ best ideas have beaten the market recently, and non-professionals can follow suit by mimicking their moves.
Goldman Sachs reviewed holdings across 693 hedge funds and 554 mutual funds, which manage $6.5 trillion in combined assets at the start of the third quarter. Its quarterly analysis is a treasure trove of information, offering insights that would otherwise be scarce.
Hedge funds and mutual funds have stuck with US stocks despite the market’s wild swings. Long-short funds are relying on leverage more than in the late 2010s, while mutual fund managers have less cash on hand now than at any time on record, Goldman Sachs found.
Goldman Sachs
Bullish bets have paid off for hedge funds, as their favorite stocks — which are still mega-cap firms like Amazon, Microsoft, Meta, Alphabet, Apple, and Nvidia — have edged out the S&P 500 recently, wrote David Kostin, Goldman Sachs’ chief US equity strategist, in an August 23 note. However, hedge funds are cutting back on those mega-cap stocks, as are mutual funds.
Mutual fund managers haven’t had as much success, as their top ideas have trailed the market by six percentage points as of late August. Only 34% of those large-cap-focused funds have topped their benchmarks this year, which is worse than the long-term average of 38% and the 50% outperformance rate in May, according to Goldman Sachs.
The disappointing showing from mutual funds stems from their large positions in economically sensitive stocks, which didn’t pan out in the second quarter.
By contrast, hedge funds have had less exposure to that trade, which boosted relative performance — especially during the early-August sell-off. Long-short funds reduced exposure to cyclicals by trimming from the consumer discretionary sector, even though they moved toward companies in financials and industrials.
Hedge fund and mutual fund managers were aligned in their outsize bets on small caps and healthcare stocks.
Smaller companies made up 45% of hedge funds’ long positions despite being only 12% of the market. Healthcare stocks stand out because they have resilient demand in any economy and offer growth at a fair price. The sector was hedge funds’ largest net sector weight and was the group mutual funds added to most in Q2, Kostin noted.
8 stocks that professional money managers adore
Of the tens of thousands of stocks across almost 1,250 hedge funds and mutual funds in the study, Goldman Sachs found that professional money managers are most bullish on eight firms.
This group of so-called “shared favorites” was up 17% as of August 23, in line with the market. Even more impressive is that hedge funds and mutual funds’ top ideas have outpaced the market by 3 percentage points a year and in 61% of months since 2013, Kostin noted.
Goldman Sachs
Below are those eight leading ideas, along with each one’s ticker, market capitalization, sector, the percentage of their value owned by hedge funds, and their overweight position in mutual funds.