Trading congestion! Bank of America warns: "Buy AI, sell consumer" strategies are increasingly difficult to generate excess returns

As reported by Zhihui Finance APP, BofA Securities has recently released its latest "Actively Managed Fund Holdings Update" report, which points out that active fund holdings have already fully reflected the "consumption shift to capital expenditure" theme. Generating excess returns by buying AI capex beneficiaries and selling white-collar consumption themes is becoming increasingly difficult, so selective rotation is recommended.

Selling Consumption, Buying AI Capex: Excess Returns Are No Longer Easy

Based on its analysis of long-only (LO) active fund sector exposures and historical data, the report finds that current positions have sufficiently reflected the "consumption shift to capital expenditure" theme. Industrial stocks' weighting relative to consumer discretionary is near historical highs; AI disruption victims such as IT services, consumer finance, and software are at historical low allocations; the weight of staples over discretionary, and tobacco over luxury goods, have surged.

BofA notes that given the current portfolio construction, it may become more challenging to extract excess returns by buying capital expenditure beneficiaries and selling white-collar consumption stocks. The bank cautions against underestimating U.S. consumer demand, and with the strength in capex likely already priced in by the market, it thus recommends a selective rotation.

TMT: Overall Neutral View, Marked Position Differentiation

Apple (AAPL.US) and Microsoft (MSFT.US) remain "core stable holdings," present in more than 80% of funds, but are slightly underweighted relative to benchmarks due to their large index weights. Other tech stocks' allocations have risen sharply since 2015. BofA maintains a neutral stance on TMT (Technology/Media/Telecom) overall, believing that risk and reward for major TMT stocks are now more reasonably reflected in their prices.

Active Funds: Non-S&P 500 Exposure Nears Record Lows

After the S&P 500 index outperformed most global equity indices for several consecutive years, active fund managers' holdings outside the S&P 500 have dropped close to historic lows. Non-S&P 500 exposure is around 15%, having reached as low as 14% in 2024, compared to 20% in 2020. Cash levels have remained low since 2024, while ADR (American Depository Receipts) holdings have held steady at about 2% over recent years.

Healthcare: Back in Focus for Fund Managers

Whether due to AI fatigue or overplayed market themes, BofA notes that an increasing number of clients have recently inquired about growth stocks unrelated to AI. Healthcare companies are returning to fund managers' radar because of their uniqueness, strong screening metrics, and benefit from demographic-driven demand as well as AI adoption. However, policy risk remains a key limiting factor, especially with U.S. midterm elections approaching. Encouragingly, the sector is currently less crowded—about 10% of funds are overweight, compared with nearly 20% during previous periods of negative policy news (such as Hillary Clinton’s 2015 tweets or Sanders’s 2019 “Medicare for All” proposal).

Tax-Loss Selling: Selling Pressure Persists

BofA usually publishes its tax-loss selling stock screens around October, as this marks the peak selling season for institutions. But with increasing client demand for earlier guidance, the bank released its list early in last month's "Holdings Report." The screen includes S&P 500 constituents that have fallen by at least 10% year-to-date and are widely overweighted. These stocks subsequently fell a further 6 percentage points. However, BofA believes selling pressure may not be over yet—for one, institutional investors did not sell heavily last month; for another, this strategy’s returns are usually worst in October. Historically, selling now and buying back as early as November has proved effective.

Reportedly, so-called tax-loss selling occurs when investors sell losing securities to convert unrealized losses into realized capital losses, thus offsetting capital gains from other investments and reducing tax liability. In markets like the U.S. where capital gains tax is imposed, this is a common and legitimate tax strategy.

Single Stock Polarization: Most Crowded vs. Most Neglected

The BofA report also lists the "most crowded" and "most neglected" S&P 500 stocks across sectors held by long-only funds.

The most crowded stocks include: Meta (META.US), Starbucks (SBUX.US), Philip Morris (PM.US), ConocoPhillips (COP.US), Charles Schwab (SCHW.US), Vertex (VRTX.US), Boeing (BA.US), Broadcom (AVGO.US), Corteva (CTVA.US), Welltower (WELL.US), Constellation Energy (CEG.US).

The most neglected stocks include: News Corporation-B (NWS.US), Hasbro (HAS.US), Hormel Foods (HRL.US), Texas Pacific Land (TPL.US), Erie Insurance (ERIE.US), Henry Schein (HSIC.US), Generac (GNRC.US), Trimble (TRMB.US), Amcor (AMCR.US), Kimco Realty (KIM.US), Eversource Energy (ES.US).