Since 2023, the seven US stock sisters “Mag 7” (including$Apple (AAPL.US)$,$Microsoft (MSFT.US)$,$Alphabet-A (GOOGL.US)$,$Amazon (AMZN.US)$,$NVIDIA (NVDA.US)$,$Meta Platforms (META.US)$und$Tesla (TSLA.US)$) It has always been the most impressive asset in the global market, with a cumulative increase of 160% since the beginning of 2023, which is 130% higher than the increase in the US stock market index. Furthermore, Seven Sisters' profit growth continues, and the profit for the first quarter of 2024 is expected to increase by 38%.

However, large US mutual funds have relatively low positions on the Seven Sisters. The holding ratio is lower than the share of the market capitalization of the Seven Sisters in the FTSE US Index.

HSBC pointed out that fund positions are light, mainly due to regulatory requirements, and have nothing to do with the fundamental factors of the Seven Sisters. It is expected that in the future, as more and more funds tend to transform and seek more relaxed regulatory conditions, capital inflows into the Seven Sisters will continue to increase.

The Seven Sisters are very good, but their fund positions are not that heavy

According to HSBC's survey of the holding data of the 150 largest US funds (with assets under management of more than 1.9 trillion US dollars), the Seven Sisters weigh 28% in the FTSE US Index, but they only account for 18% of these funds' portfolios.

The 10% allocation gap has seriously dragged down performance: according to HSBC's calculations, since 2023, due to the Seven Sisters' positions being too light, the net drag on the fund's performance has been more than 2.3%.

However, paradoxically, although the holding ratio is lower than the market capitalization weight of the Seven Sisters, the Seven Sisters are already the stocks with the heaviest positions in these funds. Whether judging from the total weight of funds or the share of funds with exposure, apart from Tesla, the other six of the Seven Sisters are among the 10 most held stocks in the FTSE US Index.

At the same time, these seven companies are also the stocks that have been sold the most. All seven companies are on the FTSE US Index list of the top ten stocks that have had their holdings reduced the most. Among them, Apple's holdings have been reduced the most.

Will more capital flow into the Seven Sisters in the future?

What's going on with this?

HSBC believes that this structural reduction in holdings is largely due to regulatory factors and does not reflect investors' fundamental views.

According to the US Investment Companies Act 1940, mutual funds must maintain “diversification” of positions, and the total weight of positions held over 5% must be kept below 25% of total assets.

For example, if a mutual fund holds shares in Apple, Microsoft, and Nvidia among the seven sisters, the positions are all 5%. However, due to the rapid rise in stock prices, after a few months, the value of the position, which originally accounted for 15% of the total assets, had already exceeded 25%. Once the 25% regulatory threshold is crossed, these funds can no longer buy shares in Apple, Microsoft, and Nvidia.

However, more and more diversified mutual funds have begun to transition to non-diversification. After the transformation, fund positions can be exempted from the diversification requirements and positions of the 1940 Investment Company Law. It's just that the transformation requires shareholder approval and may be viewed negatively by potential customers.

However, due to the increasing concentration of US stocks, more and more funds tend to transition. For example, T Rowe Price reclassified some of its large-cap growth funds as non-diversified funds in 2021; Fidelity followed suit in 2023.

HSBC believes that more funds will explore this route in the future, thereby driving more capital to flow into the Seven Sisters.

Analysts also pointed out that as artificial intelligence becomes more advanced and complex, as R&D and investment grow exponentially, and barriers to entry increase, the moat built by the Seven Sisters will become more entrenched and become a more scarce high-quality asset.

Editor/Jeffrey