Mutual fund performance was weak during the first eight months of the year but has since stabilized, according to Goldman Sachs.
Only 31% of large-cap mutual funds are outperforming their benchmarks year-to-date (YTD), which is below the historical average of 38%. However, 41% of large-cap value funds have surpassed their benchmarks, which is a stronger performance compared to 33% of growth funds and just 24% of large-cap core funds.
Since Election Day, both mutual funds and exchange-traded funds (ETFs) have experienced inflows, mirroring the trend seen in the aftermath of the 2016 election.
Goldman notes that historically, during nine presidential election years since 1988, mutual fund cash holdings as a percentage of assets tend to decrease by a median of roughly 0.3 percentage points in the months following the election.
However, current mutual fund cash balances are at a record low, with US equity mutual fund cash amounting to only 1.4% of total assets, which equals the record low.
In the weeks following this year's Election Day, funds have seen over $50 billion in inflows, surpassing the $45 billion influx seen in the same period after the 2016 election. While active mutual funds have seen $262 billion in outflows YTD, passive ETFs have attracted $361 billion.
“Notably, “active” ETFs have experienced $63 billion of inflows,” Goldman said in a note.
The bank highlighted several themes among mutual funds' performance this year.
For instance, the average large-cap mutual fund is significantly underweight in the "Magnificent 7" mega-cap tech stocks, with four of these stocks – Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), and Nvidia (NASDAQ:NVDA) – being among the top 20 most cut.
In contrast, Tesla (NASDAQ:TSLA) was the most added stock.
Moreover, upcoming index weighting changes by S&P and Russell, which will implement a cap on weights in select indices, could impact fund performances, especially since large-cap underweights have contributed to fund underperformance YTD.
Lastly, mutual fund positions before Election Day indicate that funds have capitalized on policy-related market rotations.
“Mutual funds carry large overweights in Financials, Cyclicals, and stocks with high US sales, which have outperformed on the back of the election results,” the report says.
It also reveals that funds are heavily overweight in Industrials while maintaining a significant underweight in Information Technology, the lowest in a decade. But this reduction, according to Goldman, the largest since Q2 2020, likely reflects strong sector performance and diversification constraints.
The average fund across all core, growth, and value styles increased allocations to Materials and Consumer Staples while reducing exposure to Consumer Discretionary and Information Technology.