Stock-pickers double down on communication companies as election volatility looms, BofA says

  • Stock-pickers trimmed overweight bets across nearly all sectors but piled further into communication-services companies in recent months, Bank of America said on Wednesday.
  • The cutting-down of most outsized positions comes as managers prepare for the 2020 US presidential election to drive outsized market volatility, Savita Subramanian, head of US equity and quantitative strategy at the bank, said.
  • Both hedge funds and long-only funds either increased their overweight stakes in the communications services sector or maintained heavy positioning.
  • Some of active funds’ most concentrated communications stakes include News Corp, Discovery, and Fox, according to Bank of America.
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Active fund managers are balancing positioning in nearly all sectors but one as election-fueled volatility nears, Savita Subramanian, head of US equity and quantitative strategy at Bank of America, said Wednesday.

After stocks’ summer rally and recent slump, active managers neutralized extended bets as election uncertainty formed “a potentially murkier backdrop” for risk assets, the strategist wrote in a note to clients. Hedge funds hold equal exposure to cyclical and defensive stocks after hitting a record gap between the two categories in April. Long-only funds reversed their months-long move to cyclical stocks.

Yet stock-pickers turned increasingly overweight in their favorite sector. Both hedge funds and long-only funds are the most concentrated in communication services shares, with News Corp, Discovery, and Fox among managers’ favorite picks. Managers either increased their weight in the sector or flat-lined, “indicating still high conviction in 2020’s narrow leadership,” Subramanian said.

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The share of managers overweight in tech stocks also increased from levels seen in February, though relative exposure versus benchmark indexes slightly declined. Managers grew less exposed to consumer discretionary stocks but a slightly larger proportion of stock-pickers turned overweight in the group.

Once a strong contrarian indicator, fund positioning has taken on a more positive stance in 2020. More funds own tech and less own energy, tracking closely with broader market moves in recent weeks. Long-only managers’ boosted stakes in real estate, consumer discretionary, and utilities stocks served them well, Bank of America said, as did their selling of energy, industrial, and financial equities.

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Long-only funds’ positioning in FANG stocks — Facebook, Amazon, Netflix, and Google-parent Alphabet — relative to the S&P 500 slid over the summer after climbing throughout last year.

Still, tech mega-caps’ dominance in recent months hasn’t driven bets against the group. Short interest in FANG names tumbled to record lows of below 1% of shares floated in August, according to the bank.

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