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Investing.com -- Large-cap mutual funds have struggled to keep up with surging benchmarks this year as underweights in artificial intelligence stocks weighed on performance, Goldman Sachs said in a new report.
The average large-cap core mutual fund has returned 9% year-to-date (YTD), while growth funds gained 11% and value funds 8%. But only 36% of funds are outperforming their style benchmarks, down sharply from more than half in April and closer to the historical average of 37%.
“Mutual funds have benefited from their cyclical tilt, but underweights in AI-exposed equities have weighed on performance,” Goldman strategists led by Ryan Hammond wrote.
Funds remain 107 basis points underweight a basket of AI-related names, even excluding the Magnificent 7, although selective additions were made in names such as Palantir (NASDAQ:PLTR), Vistra Energy (NYSE:VST), Snowflake (NYSE:SNOW), and GE Vernova (NYSE:GEV).
At the same time, managers have extended their underweight to the Magnificent 7, which reached 819 basis points at the start of the third quarter, compared with 723 basis points in the previous quarter.
“The performance of the Mag 7 has been volatile YTD, but the group has outperformed the S&P 493 by 3 pp YTD (+13% vs. +10%),” Goldman said.
Goldman also pointed out that “return dispersion has risen to the widest level since 2020, offering mutual funds a fertile backdrop for alpha generation.” Despite this stock-picking opportunity, active managers have struggled to translate it into excess returns.
Sector positioning reflects the same tilt away from technology. The average large-cap mutual fund increased overweights in Financials by 42 basis points and Industrials by 39 basis points, ranking those tilts in the 97th and 100th percentiles relative to the past decade.
By contrast, Information Technology sits at a record low, with funds 536 basis points underweight the sector.
At the stock level, Goldman’s Mutual Fund Overweight basket has returned 6% year-to-date, lagging the equal-weighted S&P 500’s 7% and trailing the Mutual Fund Underweight basket’s 15%.
The underweight list includes some of the market’s strongest performers, such as Nvidia (NASDAQ:NVDA), Tesla (NASDAQ:TSLA), and Microsoft (NASDAQ:MSFT).
Another theme Goldman highlighted was the resurgence of the index inclusion effect. Stocks added to the S&P 500 have often outperformed into announcements, with 8% of large-cap funds typically owning them ahead of inclusion and 11% three months after.
Despite a wide dispersion in stock returns—the largest since 2020—mutual funds have not converted it into meaningful outperformance.
Cash levels were trimmed to 1.4% of assets, reversing much of the build-up earlier in the year, but U.S. equity mutual funds and ETFs still recorded $5 billion of outflows in the past four weeks.