August 2024 began with a stock market decline that undermined the recent performance of technology stocks. From August 1 to August 5 (just three business days), the Morningstar Global Technology Index fell 9.4%, and the US-only index fell 9.0%. This exceeded the loss for the broader U.S. market, which fell 6.3%, and was the Morningstar U.S. Market Index’s worst five-day return since June 2022. The market rebounded the following week, but this shows the risks of betting big on the market. unstable sector.
Large growth funds have been burned out by their overemphasis on tech. Several funds provide examples of such industry concentration and sensitivity to quick corrections. Funds that rode the technology wave in 2023 could just as easily fall into a downturn.
Algiers Capital Appreciation ACAAX, which has a Morningstar Medalist rating of Neutral, had 48.4% of its net assets in the technology sector as of May 2024. This is significantly higher than the 41.0% average for the fast-growing Morningstar category. The firm’s top 10 holdings include Microsoft MSFT, Nvidia NVDA, Apple AAPL, and Broadcom AVGO, which make up about half of the Morningstar US Technology Index. The portfolio is based on belief, with managers favoring larger technology companies. Like the rest of the technology industry, these companies suffered a sharp decline in early August, with losses ranging from 5.5% to 14.2% in the first five calendar days.
The fund’s exposure to the sector made it vulnerable to market volatility in early August, when the fund fell 7.6%. Alger Capital Appreciation’s earnings profile is often shaped by its technology leanings. Through 2023, the fund benefited from heavy allocations to Microsoft and Nvidia and returned 43% year-over-year, outperforming the average large-growth fund. In contrast, the fund remained in the bottom quartile of its peer group in total return for the month ending Aug. 13.
American Century Ultra TWCUX is similarly rated neutral and focuses on the technology sector, with a portfolio of 60 to 90 stocks from the Russell 1000 Growth Index. The team employs constraints such as limiting investment amounts and sector exposure to the top five stocks to within 5 percentage points of the index. However, due to the sheer size of technology companies, this industry remains at the top of the allocation list.
As of June 2024, the fund held 47% of its net assets in the technology sector, 6 points above the average for its category. Microsoft, Nvidia, and Apple accounted for about a third of the portfolio. The fund fell 7.5% in early August market turmoil due to headwinds in the tech sector. Portfolio constraints were unlikely to positively differentiate downside performance.
There are only 30 positions in the Bronze rated PGIM Jennison Focused Growth SPFAX. This approach leverages the firm’s analytical capabilities and fundamental research to identify high-growth companies with strong financial strength. The resulting portfolio is more heavily weighted in technology compared to the category average: 46.4% vs. 41.0%. However, the managers’ highly selective approach may deviate from the fund’s Russell 1000 Growth Index benchmark, allowing the portfolio to underweight the biggest tech stocks in their opinion. Masu.
The fund lost 7.0% in the early August sell-off. Because the fund had less exposure to the Magnificent Seven stocks, its losses were smaller than those of the funds mentioned above.
This article first appeared in the September 2024 issue of Morningstar FundInvestor. Visit this website to download your free copy of FundInvestor.
