According to a new report from Goldman Sachs (NYSE:GS), hedge funds and mutual funds are starting to rotate back into growth stocks from value stocks. These investors are steadily building up their positions in industries like information technology and consumer discretionary. Sub-sectors within these industries include auto, semiconductors and e-commerce.
In a client note, top U.S. equity strategist David Kostin added:
Mutual funds moved 66 bp away from Value, but still rank in the 79th percentile vs. the past 10 years. Hedge funds added 74 bp of exposure to Growth and cut length in Value by 30 bp. However, hedge funds are still less tilted to Growth than usual (508 bp vs. 728 bp average).
The report also shows that mutual funds’ exposure to growth stocks are their highest levels since mid-2018. In addition, many mutual funds are increasing their exposure to mega-cap tech names, such as Tesla (NASDAQ:TSLA), and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
5 Growth Stocks That Hedge Funds Are Buying Now
Growth stocks have experienced a rough year thus far. For example, the Vanguard Growth Index (NYSEARCA:VUG) exchange-traded fund (ETF) is down over 20% year-to-date (YTD), while Cathie Wood’s ARK Innovation ETF (NYSEARCA:ARKK) is down over 50% YTD.
However, after steep declines, growth stocks may be more appealing to institutional investors. Goldman’s research shows that weight into growth stocks with no or low profitability from hedge funds with long portfolios rose to 3.8% from 3.5%. Meanwhile, the weight of growth stocks with high-profit margins declined for a third consecutive quarter. The rotation back into “lower quality stocks” has acted as a tailwind for the second half of the year’s returns.
So, which stocks exactly are hedge funds buying? The top five names include ServiceNow (NASDAQ:NOW), Uber (NYSE:UBER), Mastercard (NYSE:MA), Visa (NYSE:V), and Humana (NYSE:HUM). Other names that made the cut include Fiserv (NASDAQ:FISV), Wells Fargo (NYSE:WFC), and Danaher (NYSE:DHR).
The rotation back into growth seems to follow a risk-on type environment. Inflation has been a major headwind to returns this year, although July’s report showed 0.3% core inflation month-over-month while economists were expecting 0.4%. The next report will be disclosed on September 13.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.