In its active managers' holdings update note to clients Friday, analysts at BofA said they believe mega-cap tech "could actually work in January."
According to the bank, two in five active US large-cap funds are ahead of the benchmark in 2023, better than the average hit rate of 37%. The best and worst-performing funds of 2023 revealed that the key decision was long mega-caps and long-term growth, high beta, and low quality.
"Leaders were uniformly overweight Communication Services (second best sector, up >50% this year) whereas laggards were 80% underweight," wrote analysts at BofA.
BofA noted that crowding is seen as a key risk in 2024. "In particular, year-end 'window dressing' may have pushed active funds into big Tech leaders, but these stocks could be used as a source of funds if a hard landing is avoided and leadership broadens beyond secular growth stocks," they explained.
"Some of this theme has played out – the equal-weighted S&P 500 has handily outperformed the cap-weighted index since mid-November," analysts at BofA added. "We hear from our clients that a broadening of market leadership is now as consensus as the unwavering bond love/equity hatred we heard at the end of 2022 (see Dec. 2022 SSI). The January pain trade may thus be higher TMT/mega-caps."
The bank also notes that passive equity flows could favor mega-cap growth, although despite the "goldilocks forecasts," positioning is still defensive.