This year, the US stock market has been dominated by a handful of major tech stocks, with companies like Nvidia (NVDA, Financial), Apple (AAPL), Meta, Microsoft, and Amazon contributing significantly to the S&P 500 Index's gains. These tech giants alone accounted for approximately 46% of the index’s rise, leading to a highly concentrated market environment.
As a result, major investment funds such as Fidelity and Putnam have been compelled to sell off tech shares to adhere to regulatory guidelines. The US IRS mandates that no more than 50% of a regulated investment company's portfolio can be concentrated in weight stocks—those where investments exceed 5% of the portfolio. This aims to encourage diversification within portfolios.
For large funds striving to maintain a heavy position in tech stocks like Nvidia and Apple, they face the risk of breaching the 50% regulatory threshold. According to reports, these investment groups have been actively selling stocks to avoid regulatory penalties.
By the end of September, Fidelity's Blue Chip Growth Fund, valued at $67 billion, saw over 52% of its holdings composed of weight stocks, including Nvidia, Apple, Amazon, Microsoft, Alphabet, and Meta. Recent data from Morningstar indicates that BlackRock's newly launched ETF also comprises 52% of weight stocks.
Putnam's Blue Chip Growth Fund, which manages $63 billion, exceeded the 50% limit for six out of the past nine months, prompting a quarterly rebalancing to comply with IRS standards.
Many US funds are nearing the 50% limit, thus complicating efforts to increase holdings in large-cap stocks. For example, the Ark Innovation ETF holds 43% of its assets in significant positions.
Stephen DD Hamilton, a partner at Faegre Drinker law firm, suggests that restructuring holdings might impact fund performance. Large-scale stock sales to address concentrated positions are far from ideal. AllianceBernstein's portfolio manager Jim Tierney notes that for active funds, maintaining an investment of 6% or 7% in a company is generally acceptable. However, with current regulations, this level might now be perceived as neutral or even underweight.
