This year, the U.S. stock market is unusually concentrated, with technology stocks such as NVIDIA, Apple contributing to about half of the index's gains. Funds like Fidelity and Pimco are forced to sell technology stocks to comply with regulatory requirements to keep the investment proportion of heavyweight stocks in the portfolio below 50%
The high concentration in the stock market has put large U.S. investment funds in a dilemma. According to the latest reports, funds such as Fidelity and PIMCO have been forced to sell technology stocks to avoid trouble with the tax authorities.
According to the requirements of the U.S. Internal Revenue Service, the total investment proportion of weighted stocks in the investment portfolio of any regulated investment company should not exceed 50%, with investments exceeding 5% considered as weighted stocks. Regulators hope investment institutions will diversify and spread their investments.
This requirement is difficult for U.S. investment companies to meet, especially in a market where U.S. stocks are at their highest concentration in history this year. So far this year, just five large tech companies - NVIDIA, Apple, Meta, Microsoft, and Amazon - have contributed to approximately 46% of the S&P 500 index's gains.
This also means that large fund companies face regulatory risks of touching the 50% red line if they want to heavily invest in tech stocks like NVIDIA and Apple. According to the Financial Times on October 24, in response to regulations, large investment funds managed by Fidelity and PIMCO were forced to sell stocks.
As of the end of September, Fidelity's $67 billion blue-chip growth fund had over 52% of its investment portfolio concentrated in weighted stocks - NVIDIA, Apple, Amazon, Microsoft, Alphabet, and Meta. According to Morningstar data, as of last week, 52% of the assets in BlackRock's recently launched long-term U.S. stock ETF were stocks with a 5% portfolio share.
PIMCO's $63 billion blue-chip growth fund has exceeded this threshold for six out of the past nine months, but it rebalances its portfolio at the end of each quarter to comply with the IRS requirements.
Reports indicate that more and more U.S. funds are approaching the 50% limit, making it difficult for them to increase large holdings. For example, 43% of the assets in the Ark Innovation ETF come from large holdings.
Stephen DD Hamilton, a partner at the U.S. law firm Faegre Drinker, said that restructuring holdings could drag down fund performance:
If you have highly concentrated positions, the solution may involve selling a large number of stocks. This is clearly not the most ideal approach.
Jim Tierney, growth portfolio manager at AllianceBernstein, said:
For active funds, this is indeed a very difficult situation. Typically, for a company you have great confidence in, a position of 6% or 7% in the portfolio is the maximum most investment managers are willing to accept. Today, this percentage may be considered neutral weight or even below standard, which is unprecedented