How well have technology stocks done so far this year? So well that they’re actually managing to make active managers look good.
According to data from Goldman Sachs GS, +0.48% more than half of large-cap mutual funds have outperformed their benchmark thus far this year, putting them on track for the highest rate of outperformance since 2009, and the exposure that the funds have to technology companies has been a major contributor to that recent bout of success.
“Information technology, the best performing sector year to date, has been a key driver of the divergence in fund performance,” wrote a team of Goldman analysts, led by David Kostin, the firm’s chief U.S. equity strategist. “Large-cap core funds are underweight Info Tech while growth and value funds are overweight the sector by 422 [basis points] and 277 bp vs. their respective benchmarks.” One basis point is the equivalent of one hundredth of a percentage point.
Fully two-thirds of large-cap value funds have outpaced their benchmark—the Russell 1000 Value index—significantly above the 10-year average of 40%. About 63% of growth funds topped the Russell 1000 Growth index, compared with the long-term historical average of 38%.
Only 37% of core funds have outperformed the S&P 500 SPX, +0.03% year to date, according to Goldman’s data, a slightly higher rate than the 34% that historically have.
The technology sector, as measured by the Technology Select Sector SPDR ETF XLK, -0.05% is up 16.6% thus far this year, more than twice the 7.9% return of the S&P 500.
Furthermore, the four largest components of the technology sector—Apple Inc. AAPL, -0.17% Microsoft Corp. MSFT, +0.49% Facebook Inc. FB, +0.11% and Google-parent Alphabet Inc. GOOGL, +0.14% —have all soared in 2017, posting double-digit climbs. Apple, the largest U.S. company by market value—and therefore, having the heaviest weight in the index—is up nearly 33%. While the outperformance in tech has lifted the broader market, the impact is obviously more concentrated within the sector.
But since the start of the year, according to Goldman, core funds have become bearish on the sector, shifting their directional view within tech to 13 basis points underweight, from a third of a percentage point overweight previously.
“The average large-cap core fund is underweight eight of the top ten contributors to the S&P 500 year-to-date return,” Goldman wrote in a note to clients. “Apple has accounted for 16% of the S&P 500 return so far this year and large-cap core funds are underweight the stock by an average of 73 basis points.”
In an actively managed mutual fund, the holdings are individually selected by a portfolio manager or team. That’s in contrast to passive funds, where the holdings simply track a benchmark. Data have repeatedly shown that basically no active funds are able to outperform the market over the long term.