August 2024 opened with a stock market selloff that undercut the recent performance of technology stocks. From Aug. 1 through Aug. 5 (just three trading days), the Morningstar Global Technology Index dropped 9.4%, while its US-only counterpart tumbled 9.0%. This exceeded the losses of the broader US market, which fell 6.3%—the worst five-day return for the Morningstar US Market Index since June 2022. The market rebounded the next week, but it’s an illustration of the risks of betting big on a volatile sector.
Large-growth funds were burned by their big tech weightings. A few funds provide examples of such industry concentration and sensitivity to swift corrections. Those funds that rode technology’s waves in 2023 just as easily struggled on the downside.
Alger Capital Appreciation ACAAX, which has a Morningstar Medalist Rating of Neutral, held 48.4% of its net assets in the technology sector as of May 2024. That was well above the large-growth Morningstar Category average of 41.0%. Among its top 10 holdings were Microsoft MSFT, Nvidia NVDA, Apple AAPL, and Broadcom AVGO—companies that represent roughly half the Morningstar US Technology Index. The portfolio is conviction-driven, with the managers expressing favor for bigger tech names. As with the rest of the technology industry, these companies suffered in the early August selloff with losses ranging from 5.5% to 14.2% over the first five calendar days.
The fund’s exposure to the sector made it susceptible to the early August market shakeup when it lost 7.6%. Alger Capital Appreciation’s return profile is often shaped by its technology leanings. Through 2023, the fund benefited from high allocations to Microsoft and Nvidia, returning 43% over the calendar year and staying ahead of the average large-growth peer. In contrast, the fund sat in the bottom quartile of its cohort for total returns over the trailing one-month period ended Aug. 13.
American Century Ultra TWCUX also receives a Neutral rating with a similar focus on the technology sector, constructing a portfolio of 60-90 stocks from the Russell 1000 Growth Index. The team employs constraints that include how much is invested in the top five names and limiting sector exposures to within 5 percentage points of those of the index. However, the sheer size of technology companies still puts the industry at the top of the allocation.
As of June 2024, the fund held 47% of its net assets in the technology sector, 6 percentage points ahead of its category average. Microsoft, Nvidia, and Apple took up roughly a third of the portfolio. Headwinds for the tech sector meant the fund tumbled 7.5% in the market tumult at the start of August. The portfolio constraints did little to positively differentiate its performance on the downside.
Bronze-rated PGIM Jennison Focused Growth SPFAX holds just 30 positions. The approach leverages the firm’s analytical talent and fundamental research to identify high-growth companies with strong financials. The resulting portfolio is overweight technology relative to the category average, 46.4% versus 41.0%. However, the managers’ highly selective approach can deviate from the fund’s Russell 1000 Growth Index benchmark, allowing the portfolio to underweight the biggest tech names when their views call for it.
In the early August selloff, the fund lost 7.0%. The loss was smaller than the above funds because the fund had less exposure to the “Magnificent Seven” stocks.
This article first appeared in the September 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.
