Markets

Mutual fund managers are betting big on banks, and it's killing them

Key Points
  • Mutual funds are most overweight in financials across all sectors, according to a Goldman Sachs analysis.
  • Bank stocks took a big hit this month on profit worries as the spread between the rate banks collect from borrowers and the rate they have to pay out to savers shrinks.
  • Citigoup, PNC Financial and U.S. Bancorp were among the top positions of mutual funds by the end of June, according to Goldman.
Traders work on the floor of the New York Stock Exchange on August 14, 2019
Spencer Platt | Getty Images

Stock pickers are heavily invested in bank stocks, and it hasn't been working out well for them.

Mutual funds are most overweight in financials across all sectors, according to a Goldman Sachs analysis of 597 equity mutual funds with $2.6 trillion of asset under management, based on their positions by the end of the second quarter. They were long consumer discretionary the most in the first quarter, the report said. The fund managers' positions on mutual funds may have changed during the third quarter.

"The decline in interest rates has also been a drag on relative fund performance because managers are overweight Financials ... the largest overweight across all sectors," Arjun Menon, U.S. portfolio strategist at Goldman, said in a note.

Interest rates plunged this month with Treasury yields dipping below historic levels as investors rushed to the safety of government bonds amid the escalated trade war. Bank stocks took a big hit this month on profit worries as the spread between the rate banks collect from borrowers and the rate they have to pay out to savers shrinks.

Citigoup, PNC Financial and U.S. Bancorp are among the top positions of mutual funds by the end of June, according to Goldman. Citigroup tanked a whooping 22% in August as bond yields collapsed, while PNC and U.S. Bancorp are down more than 8% in August.

The S&P 500 financials sector sank briefly into correction territory earlier this month, whacked by both falling interest rates as well as an inverted yield curve.

However, Warren Buffett is still a big fan of banks.

His Berkshire Hathaway slightly increased its bet on bank shares in the second quarter, according to a regulatory filing. Berkshire's Bank of America stake was increased by 3.5% last quarter, and it raised its holding of U.S. Bancorp by 2.4%. Other big bank holdings, including Wells Fargo and J.P. Morgan Chase, remained the same.

Bank of America dropped more than 10% this month and J.P. Morgan fell more than 5% amid intensifying fears of a recession.