$5 trillion fund favorites: 12 stocks mutual and hedge funds love

Alistair Berg

Hedge funds and mutual funds are exposed to stocks that will outperform if U.S. inflation and rates fall next year, according to Goldman Sachs’ equity team.

Goldman analyzed 786 hedge funds with $2.3T of gross equity positions and 548 mutual funds with $2.5T of AUM at the start of 4Q 2022.

“Hedge funds and mutual funds are overweight cyclical sectors such as Industrials (XLI), Materials (XLB), and Energy (XLE),” strategist David Kostin wrote in a note. “Both hedge funds and mutual funds are underweight the defensive Utilities (XLU) and Consumer Staples (XLP) sectors. However, both fund types are also overweight Health Care (XLV), which we also recommend as an overweight position.”

“Info Tech (XLK) is the largest underweight exposure for both investor types, although they both increased exposure to the sector during 3Q,” Kostin said. “Financials (XLF) represents one sector where hedge funds and mutual funds hold different exposures: Mutual funds are overweight while hedge funds are underweight.”

“Another area where hedge funds and mutual funds disagree is Big Tech,” he added.

Microsoft (MSFT), at No. 1, Amazon (AMZN), No. 2, Alphabet (GOOG) (GOOGL) in third and Apple (AAPL), No. 7, are among the top 10 most important positions among hedge funds, Kostin said. But mutual funds are nearly 5 percentage points underweight the group.

In Goldman’s assessment, there are 12 favorites among hedge funds and mutual funds.

“We define shared favorites as stocks that screen into both our Hedge Fund VIP and Mutual Fund Overweight baskets,” Kostin said.

“The median shared favorite trades at a 34% NTM P/E premium to the median S&P 500 (SP500) (SPY) stock (23x vs. 17x), above the long-term average of 18%. Consensus expects 15% profit growth for the median shared favorite in 2023, compared to 7% for the median S&P 500 stock.”

The desired dozen:

Constellation Energy (NASDAQ:CEG)
Danaher (NYSE:DHR)
Fiserv (FISV)
Humana (HUM)
Mastercard (NYSE:MA)
ServiceNow (NOW)
Schwab (SCHW)
Uber (UBER)
UnitedHealth (UNH)
Visa (V)
Workday (WDAY)
Wells Fargo (WFC)

On the other end there are 23 stocks – mostly big names – that hedge funds are shorting and mutual funds are underweight, according to the Goldman analysis.

The unloved: