According to the latest "Active Manager Position Update" report released by BofA Securities, active fund positions have fully reflected the "consumption to capital expenditure" theme, and it is becoming increasingly difficult to earn excess returns by buying AI capital expenditure beneficiaries and selling white-collar consumption themes, suggesting a selective shift.

Selling Consumer, Buying AI Capex: Excess Returns No Longer Easy

Based on an analysis of long-only (LO) active fund industry exposure versus history, the report believes that current positions have fully reflected the "consumption to capital expenditure" theme. Industrials relative to consumer discretionary positions are near historical highs; IT services, consumer finance, and software — the "AI disruption victims" — are near historical lows; staples relative to discretionary, and tobacco relative to luxury goods, have seen weights surge. BofA stated that given the current portfolio structure, obtaining excess returns by buying capital expenditure beneficiaries and selling white-collar consumption theme stocks may be more difficult. The firm reminded that one should not underestimate the demand of American consumers, and the strength in capital expenditure may have already been more 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 large benchmark weights; other tech stocks have seen positions jump significantly since 2015. BofA holds a neutral view on TMT (technology/media/telecom) overall, believing that the risk and return of TMT large-cap stocks are now more reasonably reflected in prices.

Active Funds: Non-S&P 500 Exposure Nears Historical Lows

After the S&P 500 index has easily outperformed most global equity indices for several consecutive years, active fund managers' positions outside the S&P 500 have approached historical lows. Non-S&P 500 exposure is about 15%, having dropped to as low as 14% in 2024, compared to 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 being over-exploited, BofA stated that recently more and more clients are inquiring about growth stocks unrelated to AI. Healthcare companies have re-entered fund managers' radar due to their idiosyncratic characteristics and outstanding performance on screening metrics, benefiting from demographic demand as well as AI adoption. However, policy risk is a key constraint, especially before the US midterm elections. Fortunately, compared to previous negative policy shocks (such as Hillary Clinton's 2015 tweet and Sanders' 2019 "Medicare for All" proposal), the industry's current crowding level is relatively low, with about 10% of funds overweight, compared to nearly 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, due to increasingly early client requests, the firm has already released it early in last month's "Position Report." The screening targets are S&P 500 constituent companies that have fallen at least 10% year-to-date and are widely overweight. These stocks have since declined by about another 6 percentage points. However, BofA believes the selling pressure may not be over yet: on one hand, institutional investors did not sell heavily last month; on the other hand, the strategy's returns are typically worst in October. Historical experience shows that selling now means buying back as early as November. It is understood that so-called tax-loss selling refers to investors selling loss-making securities, converting unrealized losses into realized capital losses, which can be used to offset capital gains from other investments, thereby reducing tax liabilities. In markets that levy capital gains taxes such as the United States, this is a common 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 by 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 Navigation (TRMB.US), Amcor (AMCR.US), Kimco (KIM.US), Eversource Energy (ES.US).