According to the latest "Active Manager Position Update" report released by BofA Securities, active fund positions have fully reflected the theme of "consumption shifting to capital expenditure," and earning excess returns by buying AI capital expenditure beneficiaries and selling white-collar consumption theme stocks is becoming increasingly difficult. The bank recommends a selective shift.
Selling Consumer, Buying AI Capex: Excess Returns Hard to Come By Easily
The report, based on an analysis of long-only (LO) active fund industry exposure versus history, concludes that current positions have fully reflected the "consumption shifting to capital expenditure" theme. Industrials relative to consumer discretionary positions are near historic highs; IT services, consumer finance, and software — the "AI disruption victims" — are near historic lows; and staples relative to discretionary, as well as tobacco relative to luxury goods, have seen weightings surge. BofA stated that given the current portfolio structure, earning excess returns by buying capex beneficiaries and selling white-collar consumption theme stocks may be more difficult. The bank cautioned that demand from the U.S. consumer should not be underestimated, and the strength in capital expenditure may already be largely priced in by the market, thus recommending a selective shift.
TMT: Overall Neutral, Positions Clearly Diverging
Apple (AAPL.US) and Microsoft (MSFT.US) remain "stable core holdings," held by more than 80% of funds, but are slightly underweight due to their large benchmark weightings; other tech stocks have seen notable jumps in positioning since 2015. BofA holds a neutral view on TMT (technology/media/telecom) overall, believing that the risk and reward of large-cap TMT stocks is now more reasonably reflected in prices.
Active Funds: Non-S&P 500 Exposure Nears Historic Lows
After the S&P 500 index easily outperformed most global equity indices for consecutive years, active managers' positions outside the S&P 500 have approached historic lows. Non-S&P 500 exposure stands at approximately 15%, having fallen to as low as 14% in 2024, compared with 20% in 2020. Cash levels have remained low since 2024, while ADR (American Depositary Receipt) holdings have remained nearly unchanged over the past few years at about 2%.
Healthcare: Back on Fund Managers' Radar
Whether due to AI fatigue or the market having been overly mined, BofA said that recently more and more clients have been inquiring about growth stocks unrelated to AI. Healthcare companies have re-entered fund managers' radar due to their idiosyncratic characteristics, outstanding performance on screening metrics, and benefits from demographic demand as well as AI adoption. However, policy risk is a key constraint, especially ahead of the U.S. midterm elections. Encouragingly, compared with previous negative policy shocks (such as Hillary Clinton's 2015 tweet and Sanders' 2019 "Medicare for All" proposal), the sector is currently less crowded, with about 10% of funds overweight, versus close to 20% during the previous two periods.
Tax-Loss Selling: Selling Pressure Has Not Subsided
BofA typically releases its tax-loss selling screening list around October, as October is the peak period for institutional selling. However, because clients have been requesting it earlier and earlier, the bank already published it ahead of schedule in last month's "Position Report." The screening targets S&P 500 constituent companies that have fallen at least 10% year-to-date and are widely overweighted. These stocks have since fallen by about another 6 percentage points. Nevertheless, BofA believes selling pressure may not be over yet: on one hand, institutional investors did not sell heavily last month; on the other hand, returns from this strategy are typically worst in October. Historical experience shows that selling now, the earliest buying back would be in November. It is understood that so-called tax-loss selling refers to investors selling losing securities to convert unrealized losses into realized capital losses, which can be used to offset capital gains from other investments, thereby reducing tax liability. In markets that levy capital gains taxes, such as the United States, this is a common and legal tax strategy.
Individual Stocks Polarized: Most Crowded and Most Neglected
The BofA report also listed the "most crowded" and "most neglected" S&P 500 stocks among long-only funds across various sectors. The most crowded stocks include: Meta (META.US), Starbucks (SBUX.US), Philip Morris (PM.US), ConocoPhillips (COP.US), Charles Schwab (SCHW.US), Vertex (VRTX.US), Boeing (BA.US), Broadcom (AVGO.US), Corteva (CTVA.US), Welltower (WELL.US), Constellation Energy (CEG.US). The most neglected stocks include: News Corp-B (NWS.US), Hasbro (HAS.US), Hormel Foods (HRL.US), Texas Pacific Land (TPL.US), Erie Indemnity (ERIE.US), Henry Schein (HSIC.US), Generac (GNRC.US), Trimble (TRMB.US), Amcor (AMCR.US), Kimco (KIM.US), Eversource Energy (ES.US).