Investors are more crowded into tech stocks than ever before

Key Points
  • Bank of America Merrill Lynch says mutual funds' technology exposure reached a "record overweight" in July.
  • This may bode poorly for tech stocks as the firm found investor positioning inversely correlates to future returns.

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Mutual funds are piling into technology stocks to a record level, according to a latest active managers holdings report from Bank of America Merrill Lynch.

But the overweighting may not be bullish for the sector going forward.

In July "large cap active managers have yet again increased their positioning in tech, setting another record overweight of 25% (+5.8 percentage points) relative to the benchmark," strategist Savita Subramanian wrote in a note to clients Monday. "This record overweight has helped managers beat their benchmarks so far this year, as tech continues to outperform all other sectors."

Subramanian's team aggregated all the positions from U.S. large-cap equity mutual funds, using FactSet institutional ownership data. They then compared the weightings versus the relevant equity index benchmark to calculate the rankings.

After analyzing the performance data, the team found investor positioning in stocks inversely correlates to future returns.

"Over the last several years, buying the most underweight stocks and selling the most overweight stocks has consistently generated alpha," she wrote.

Alpha is defined as the excess return of a portfolio relative to a market benchmark's performance.

Subramanian has said it's more difficult for crowded stocks to move higher since everyone is already in the trade. Moreover, when sentiment shifts there may be more downside risk as investors flee for the exits at once.

As a result, investors may want to avoid the most overweight and crowded stocks in any given sector.

Here are the top 10 most overweight technology stocks, according to Bank of America Merrill Lynch.

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