Mega cap outperformance not due to passive flows: Citi

Investing.com -- While passive flows from mutual funds and exchange-traded funds (ETFs) have provided a consistent tailwind for equities, they are not the defining factor behind individual stock performance, according to Citi.

Passive vehicles have been the most persistent buyers of US equities since the end of 2022, Citi’s analysis of 13-F filings shows. However, the bank highlights that “changing market structure, especially the use of leveraged vehicles, may explain still low r-squared between Passive flows and differences in stock performance.”

Ownership patterns reveal nuances. Passive funds dominate the S&P 100, owning a greater share than active funds. Yet, for the rest of the S&P 500 , ownership is more balanced, and small-cap stocks lean more heavily toward passive ownership. Active managers, on the other hand, show a lower bias toward mega caps in their long positions.

The key differentiator, Citi notes, lies in the interplay between active and passive flows.

“Where both Active and Passive are aligned in positive flows, the probability of outperformance has been higher since the end of 2022,” the report states. Stocks with concurrent positive flows from both segments have outperformed their industry peers in nearly 60% of cases. Conversely, stocks facing active selling, even when supported by passive inflows, often struggle.

While mega caps have led the market rally since 2022, Citi’s data indicates that many of these names have faced selling pressure from active mutual funds, ETFs, and hedge funds.

Concentration limits, profit-taking, and risk management practices are likely at play, particularly among names in the “Magnificent 7,” which include companies like Apple (NASDAQ:AAPL ), Amazon (NASDAQ:AMZN ), and Meta (NASDAQ:META ). Notably, the report highlights that active managers have significantly lightened positions in several of these stocks over the past two years.

Ultimately, Citi concludes that flow trends, rather than ownership levels, hold greater relevance in explaining performance disparities. The data suggests that active managers, even amid outflows, are key in shaping the landscape of US equity performance.

Source: Investing.com