Active managers warn of 'crowding risk' in mega-cap tech in 2024
The risk is that mega-cap tech stocks may be used as a 'source of funds' if a hard landing is avoided.
According to Bank of America research, the risk is that such stocks — with the largest seven responsible for 60% of S&P 500 gains last year — may be used as a «source of funds» if a hard landing is avoided.
Institutional fixed income investors set to take on greater risk in 2024
Respondents to the BofA survey claimed the broadening of market leadership is now a consensus, meaning the trading activity in January is likely to heavily feature technology, media and communications mega-caps.
The survey also revealed that the best-performing funds of 2023 held long mega-caps, with technology and communication services as the top two sectors for the year.
Laggard funds were largely (80%) underweight communication services, BofA found.
The top performing funds also had lower active share and lower turnover in 2023.
«At some level, the more similar a fund was to the index, the better it fared,» BofA analysts said.
The company found evidence of rising equity allocations but warned that if passive equities are the vehicle of choice, «inflows could continue to feed mega-cap growth companies».
This is because passive index funds with dividends reinvested tend to allocate their inflows according to market capitalisation. As such, if dividend payers drop «after their ex-date», driving shrinking capitalisation, such funds would favour larger, higher growth companies, which pay low or no dividends.
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