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• Goldman Sachs identifies issues for mutual funds
• S&P 500 set up too concentrated
• Heavyweight tech giants cause trouble
The S&P 500 is considered an index whose composition reflects a broad segment of the market. The US stock index recently hit a new all-time high. Driven, among other things, by a group of stocks that is currently showing no stopping its performance – this is also reflected in the weighting of the index.
23 percent of the S&P 500 are FAAMG
The shares of the five US mega-caps Facebook, Amazon, Apple, Microsoft and Google have shot up inexorably in the past few weeks and brought correspondingly high market capitalizations. The iPhone maker, for example, had a market value of two trillion US dollars. In the meantime, the FAAMG made up 23 percent of the S&P 500. The Russell 1000 is similarly focused – although a large number of stocks are represented in each case, the percentage weighting is decisive.
This circumstance can lead to difficulties for many investment funds, as fewer shares of the individual mega-caps can be accepted.
“Tech is the largest underweight in the large-cap mutual fund sector for the first time since at least 2012,” Yahoo Finance quotes from a recent note from US investment bank Goldman Sachs.
Mutual funds could not participate in tech profits
With the S&P 500 now more concentrated than ever before, mutual fund difficulties arise, the US bank noted. Accordingly, the large-cap investment funds were comparatively under-exposed, which is why they were unable to participate extensively in the profits. Because according to the rules of the Securities and Exchange Commission (SEC), concentrated investment funds may not have more than 25 percent of an industry. In order to diversify, they must “disclose in their prospectus any policies to concentrate their investments,” according to Yahoo Finance.
Large funds that are not set up in a concentrated manner would not have to comply with these disclosures. However, a temporary excess for defensive purposes with disclosure could be allowed.
What happens when mutual funds hit their cap
The valuable tech giants bring a new underweight to the portfolio holdings of some mutual funds. A solution does not seem to be found for many, Goldman Sachs wrote. “Vanguard closely monitors the underlying portfolio holdings and disclosures of our funds and occasionally tracks changes in the diversification status of a fund to avoid violating the diversification rule,” said the investment bank.
For its own strategy, Goldman Sachs found that a solution could also be found in investing in other investment vehicles. Some funds may be closed due to the unusual situation.
Finanzen.net editorial team
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