Stock pickers remain braced for a Fed ‘soft landing’, mutual fund holdings show

According to an analysis by Bank of America, professional stock pickers are still betting that the US economy could avoid a recession.

Actively managed mutual funds have maintained their pro-cyclical stance with overweight positions in consumer discretionary and industrials, while being significantly underweight in consumer staples, according to Bank of America’s monthly analysis of fund holdings. Consumer discretionary and industrials are generally sensitive to economic turmoil, while underlying stocks are viewed as defensive stocks.

“Long-only mutual funds appear to be poised for a soft landing,” said Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, in a statement.

Positioning indicated that the cohort appeared bullish on the economy despite the Federal Reserve tightening monetary policy at the most aggressive pace since the 1980s. The central bank raised interest rates by three quarters of a percentage point for the third time in a row in September and promised further rate hikes.

Big-name investors from Stanley Druckenmiller to Paul Tudor Jones have warned that an economic downturn is inevitable at this point as inflation has proved more stubborn than expected.

Still, mutual funds are not well positioned to hedge against persistent inflation or a strong dollar.

Bank of America data showed that active managers are “heavily” underweight the bank’s basket of inflation beneficiaries, while their dollar exposure favors stocks less exposed to a strong greenback.

So far this year, 39% of active large-cap funds have outperformed their benchmarks, more than the 35% average over the past decade, Bank of America said. However, investors’ capital continued to flow from active to passive strategies due to lower fees, the Wall Street firm said.