- Growth-focused mutual fund managers are underperforming as stocks with high multiples sell off.
- But buying the dip in beaten-down names has been a winning strategy lately.
- Here are 15 stocks that growth fund managers are adding to now, according to Goldman Sachs.
Mutual funds are having their strongest year since 2009, according to Goldman Sachs. As for growth-focused funds? Not so much.
50% of large-cap mutual funds are beating benchmarks this year, which is a 13-year high and far above the 10-year average rate of 34%, wrote Cormac Conners, a US portfolio strategy research associate at Goldman Sachs, in an August 25 note. That’s based on the firm’s analysis of 577 funds that manage a total of $2.7 trillion in assets.
But only 38% of large-cap growth mutual fund managers are beating the Russell 1000 index this year compared to 58% of their large-cap value counterparts, Conners noted. According to Goldman Sachs the Russell 1000 has declined by 17% in 2022, while the average growth mutual fund is down 20% year-to-date.
The underperformance stems from a wicked combination of being light on cash and having too much exposure to shares of companies that have gotten crushed this year. Conners summed it up best, writing that “the stocks that growth managers are most overweight have struggled.”
In fact, a group of 50 stocks that growth managers love most just had its worst trailing 12-month return versus the Russell 1000 Growth benchmark since at least 2013, Conners noted.
But instead of switching strategies, growth fund managers have doubled down on beaten-down names — and their patience is finally being rewarded.
“Growth mutual funds have been ‘catching the falling knife’ of high valuation stocks in 2022,” Conners wrote in the note. “This strategy has started to pay off in 2H.”
Coming into the year, growth fund managers were slightly underweight a group of 24 high valuation stocks in the Russell 1000 growth index that, at the time, had an EV-to-sales ratio of over 20x. After a massive market selloff, growth managers became net buyers of those two dozen once-pricey names to the point that they’re now overweight them.
“Growth managers were buyers of these stocks in 1H as the median stock fell 51% and saw its multiple decline 59%,” Conners wrote. “By the end of June, the average growth fund held a 107 bp [1.07 percentage points] overweight position in these stocks. Since then, the median stock on the list has rallied 17%.”
Below are 15 stocks from the list of 24 once-high-fliers that growth fund managers have added exposure to this year, according to Goldman Sachs. The companies in this group are expected to increase sales by an average of 25% in 2023. Along with the stock is its ticker, sector, year-to-date change in forward EV-to-sales multiple, and year-to-date exposure by growth funds.