Tech Stocks: Why No Love From Fund Managers?

Summary

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Podcast Summary: WSJ Your Money Briefing

Episode: Tech Stocks: Why No Love From Fund Managers?

Date: March 7, 2018 | Host: JR Whalen | Guest: Chelsea Delaney

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Overview

This episode explores a surprising trend in the financial markets: despite their strong performance, technology stocks are falling out of favor with active fund managers and hedge funds—the so-called "smart money." WSJ reporter Chelsea Delaney joins host JR Whalen to discuss why these investors are pulling back from tech, what this signals for the sector and broader market, and what it means for everyday investors.

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Key Discussion Points & Insights

1. Declining Interest from Fund Managers

• Fund managers scaling back on tech: Holdings in tech companies have dropped to a 15-month low, as revealed by a new Bank of America report.
  • Chelsea Delaney [01:09]: "Active fund managers in particular have backed away from tech stocks."
• This comes as a surprise given tech's strong historical performance—e.g., the S&P’s tech sector jumped nearly 40% the previous year.

2. Why the Retreat?

• Growth isn't as special anymore: A global economic recovery, higher energy prices, a weaker dollar, and corporate tax cuts are boosting earnings across various sectors, making tech’s outperformance less exceptional.
  • Chelsea Delaney [02:08]: "It just makes tech's growth look a little bit less exceptional."
• Valuation concerns: After years of meteoric rises, tech stock prices look pricey to many fund managers.
  • Chelsea Delaney [03:07]: "Tech stocks have been rising for years and they are looking more expensive."
• Caution about corrections: Fund managers believe the sector could be vulnerable after such dramatic gains.
  • JR Whalen [03:33]: "I guess the fund managers are just thinking that we've seen this movie before... they want to be in a position just from a position of caution."

3. Sector Structure Still Favors Tech

• Tech's influence remains high: Because the S&P 500 is weighted by market value, giants like Amazon and Microsoft continue to sway overall market performance.
  • Chelsea Delaney [03:55]: "The S and P is weighted by market value. That gives companies like Amazon and Microsoft a much bigger sway over the broader US Market."

4. Divergence Between ‘Smart Money’ and Passive Investors

• Smart Money steps back, passive money flows in: While fund managers pull back, retail and passive investors (such as ETF buyers) keep pouring money into the sector.
  • Chelsea Delaney [04:27]: "ETF flows are still really strong into tech funds. Some of the less active investors still are buying a lot of tech stocks."

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Notable Quotes & Memorable Moments

• On the surprising pullback:
  • Chelsea Delaney [01:42]: "That's notable because this is the smart money... people who are doing a lot of research and have a really good sense of the industry. The fact that those investors are starting to get a little more cautious on the sector is interesting."
• On broader market competition:
  • Chelsea Delaney [02:08]: "Now a lot of companies are doing really well... so it just makes tech's growth look a little bit less exceptional."
• On risk of a correction:
  • Chelsea Delaney [03:07]: "There has been a bit of concern about just how fast they've risen and if it's possible for the S&P's tech sector to notch another 40% gain this year."
• On market structure and tech’s sway:
  • Chelsea Delaney [03:55]: "Amazon, Microsoft, Netflix, those have been the companies that have really been driving the S and P and the NASDAQ this year."

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Key Timestamps

| Timestamp | Segment | Key Points/Quotes | |-----------|------------------------------------------------|--------------------------------------------------------------------------------------------| | 01:09 | Fund managers moving away from tech | "Active fund managers in particular have backed away from tech stocks." | | 02:08 | Tech outperformance less unique | "Tech's growth looks a little less exceptional." | | 03:07 | Concerns about sector valuation | "Tech stocks have been rising for years and they are looking more expensive." | | 03:55 | Tech's ongoing market influence | "The S and P is weighted by market value... Amazon and Microsoft... sway over the market." | | 04:27 | Investor flow patterns | "ETF flows are still really strong into tech funds." |

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Conclusion

In summary, despite tech's continued prominence in market indexes and solid gains, experienced fund managers are cooling on the sector due to concerns about valuations, loss of distinct outperformance, and risk of an overdue correction. Meanwhile, passive investment flows remain robust, highlighting a growing divergence in investor behavior. The episode underscores the importance of understanding market dynamics beyond headline gains, especially for those considering tech in their portfolios.

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Transcript

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[Advocate/Activist]

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[Chelsea Delaney]

This is yous Money Matters from the Wall Street Journal.

[JR Whalen]

Welcome to youo Money Matters. I'm JR Whalen in New York. Tech stocks are loved by investors. In fact, the tech sector is one of the most high flying on Wall street in recent years. But if you ask fund managers, they might say seeking out tech stocks is like looking for love in all the wrong places. Wall Street Journal reporter Chelsea Delaney joins us to explain why fund managers liking toward tech stocks has soured. CHELSEA Active fund managers in particular have backed away from tech stocks.

[Chelsea Delaney]

There was a report from bank of America this week that showed holdings of tech stocks have fallen to a 15 month low, which is kind of surprising because tech stocks have been a very popular trade in the past couple years. They've just been on a tear. I think The S&P's tech sector was up almost 40% last year. They've been doing really, really well. Some of these fund managers and hedge funds as well have been pulling back.

[JR Whalen]

Yeah, the hedge funds also, that seemed to be a surprise as well.

[Chelsea Delaney]

That's notable because this is the smart money. This is what people call the smart money. These are the investors who are doing a lot of research and have a really good sense of the industry. The fact that those investors are starting to get a little more cautious on the sector is interesting.

[JR Whalen]

It seems a big reason for this is that while tech stocks are still performing well, they're not outpacing other sectors as much as they once did.

[Chelsea Delaney]

Right. It's not necessarily a bad story here. For a long time, tech was the place where you could get a lot of growth because tech stocks, their earnings were growing double digit and they were doing really well. But now a lot of companies are doing really well. So, you know, we've had this big recovery in global growth. We've had higher energy prices. A weaker dollar is helping companies and now we have the tax cut. So a lot of companies are, you know, their earnings, their revenues are growing a lot. So, you know, it just makes tech's growth look a little bit less exceptional.

[JR Whalen]

And we're Speaking with reporter Chelsea Delaney. And you're listening to youo Money Matters from the Wall Street Journal. Welcome back, everybody. Chelsea, another reason fund managers seem to have soured a bit toward tech stocks is that they feel that the pronounced run up that the sector has seen could put the tech sector in a position for a correction.

[Chelsea Delaney]

Right. So as we sort of talked about, tech stocks have been rising for years and they are looking more expensive. A lot of stocks are above averages over the past couple years. So there has been a bit of concern about just how fast they've risen and if it's possible for the S&P's tech sector to notch another 40% gain this year.

[JR Whalen]

And so I guess the fund managers are just thinking that we've seen this movie before. They want to be in a position just from a position of caution, just in case something were to happen.

[Chelsea Delaney]

And just the sector has gotten expensive. So there are just a lot more opportunities now.

[JR Whalen]

And just to be clear, it's not as if the tech sector is declining. The sector still is supporting the market pretty strongly.

[Chelsea Delaney]

They are. That's partially just because of how the indexes are structured. The S and P is weighted by market value. That gives companies like Amazon and Microsoft a much bigger sway over the broader US Market. Amazon, Microsoft, Netflix, those have been the companies that have really been driving the S and P and the NASDAQ this year.

[JR Whalen]

Whether it's fund managers or hedge funds, it's the smart money, as you call it. And their movements kind of carry the spotlight.

[Chelsea Delaney]

They do. And if you look at some of these other investor flows, like ETF flows, are still really strong into tech funds. Some of the less active investors still are buying a lot of tech stocks. But the smart money does seem to be taking another look at it now.

[JR Whalen]

Okay, that's reporter Chelsea Delaney joining us. Chelsea, thanks for being with us.

[Chelsea Delaney]

Thank you.

[JR Whalen]

And thank you for listening to your Money Matters. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner 1]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Small Business Owner 2]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner 1]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Small Business Owner 2]

they need while increasing megastore profits. They deserve it, don't they?

[Advocate/Activist]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.