The bull market in the US stock market is essentially a bull market for these seven giants of tech with huge market caps. But the biggest investors in the US, those ginormous fund management companies, can't pile on the "Magnificent Seven" because they're bound by the rules of "diversification".
However, these funds are willing to ditch their "diversification" status and pump up their holdings in the "Magnificent Seven", unleashing a fresh wave of investment funds flooding into these behemoth stocks.
$HSBC Holdings PLC(HSBC)$ did some digging and found that almost every US fund manager- those with assets under management (AUM) of more than $1.9 trillion - underweights the "Magnificent Seven".
Specifically, while the "Magnificent Seven" - $NVIDIA Corp(NVDA)$ $Apple(AAPL)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Microsoft(MSFT)$ $Meta Platforms, Inc.(META)$ $Tesla Motors(TSLA)$ $Amazon.com(AMZN)$ - account for 28% of the FTSE US index, they only make up 18% of these funds' portfolios.
It should be pointed out that the low allocation of large US funds to the "Magnificent Seven" is not because they are not optimistic about these large market cap stocks, but is subject to market rules.
The Investment Company Act of 1940 says that an asset manager's portfolio holdings exceed 5% of its total assets, it's considered "excessive." And to maintain their "diversification" status, mutual funds have to keep their investments in any one stock below 25% of their total assets. So, once they hit that 25% ceiling, they can't buy more shares.
To buy more shares of those skyrocketing stocks like the "Magnificent Seven," funds would have to reclassify themselves as "no-diversification" companies, which requires shareholder approval. But a growing number of funds are prepared to go this route.
In 2021, $T. Rowe Price(TROW)$ changed the status of some of its high-market-cap growth funds to "no-diversification", and $Fidelity National(FNF)$ followed suit in 2023.
HSBC predicts that as the "Magnificent Seven" leverage their resources to develop AI, more funds will ditch their "diversification" status to avoid lagging behind in the race for portfolio returns.
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