The average large-cap mutual fund is underweight the Magnificent 7

The average large-cap mutual fund is 671 basis points underweight the Magnificent Seven stocks in the second quarter, according to Goldman Sachs research.

Goldman Sachs analysts in a note said that the large index weight of the Magnificent Seven stocks — (AAPL), (MSFT), (GOOGL), (AMZN), (NVDA), (META), (TSLA) — creates a challenge for many fund managers.

Within the Russell 1000 Growth Index (NYSEARCA:IWF), “diversification guidelines mean that fund managers cannot own the benchmark weight and still be classified as a diversified mutual fund,” wrote Analyst Ryan Hammond.

In the second quarter, core and growth managers were under weight all seven stocks at 1,035 basis points and 1,405 base points respectively. Value managers, on the other hand, were overweight the seven stocks by 426 basis points.

“These tilts benefited funds when the Magnificent Seven fell by 17% between July 10 and August 5 (the summer sell-off),” said Hammond. The S&P 500 Equal Weight (RSP) was down 3%.

“However, as the share prices of these stocks have recovered, mutual fund performance has once again been challenged.”

Going into the sectors, the average mutual fund is currently most overweight financials (XLF) at 147 basis points, and industrials (XLI) at 137 basis points (near its 10-year high at 90^th percentile), and most underweight information technology (XLK) at -358 basis points.

Real estate (XLRE) is the second most underweight sector, but its tilt is at a 10-year-high.