What ASX 200 fund managers are buying, and why it is backfiring
Morgan Stanley tracked where 62 active Australian equity funds invest, and tested whether following them actually pays off.
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Mentioned
KEY POINTS
- Australian fund managers are running their deepest underweight in the banks, led by a CBA short worth four times the next-biggest position, and the trade is down around 21% over the past year as those stocks led the market.
- The cohort is long defensives and non-bank financials instead, anchored by Macquarie, RIO, Santos, Telstra and CSL, though conviction in healthcare names like CSL and ResMed is being trimmed.
- Morgan Stanley found the funds' monthly buying and selling predicts returns better than their actual holdings, with a basket tracking the biggest position changes up around 17% and beating the market in about two thirds of months.
Australia's active fund managers have spent over a year betting against the country's biggest stocks, and their thin exposure to the banks and miners has weighed on returns.
Since January 2025, Morgan Stanley has been tracking 62 actively managed Australian equity funds to work out where they are investing. These funds are the third-largest owners of Aussie shares, behind superannuation and offshore, and the most active traders. It’s helpful to know where their money is.
How they aggregated the data, what they found
In a June 22 note, Morgan Stanley showed how it collected the monthly fact sheets from 62 Australian equity funds, pulling out each fund's top stock holdings and sector breakdown. Since funds report in different formats, they converted everything into one common measure, "active weight," meaning how much each fund holds above or below its benchmark index (the ASX 200, ASX 300 or All Ords). They then averaged it all together to show how the whole group of funds is leaning.
The findings show us that these fund managers are underweight Financials, Materials and Real Estate. Whereas, Healthcare is the largest overweight position in relation to the market benchmark, while Industrials has seen the biggest building in active weight over the past few months.
A closer look sector by sector
The sectors sitting underweight in Morgan Stanley's research:
Financials: Fund managers are heavily underweight large banks, with 87% of them Underweight and an average active weight of -8.0 ppts. This is driven by funds being underweight Commonwealth Bank more than any other single stock, and 4x more than the next most underweight stock. Westpac and NAB are also underweight, however ANZ is the only major bank held overweight, having shifted from underweight over the past year.
Materials: The second most underweight sector. BHP is the main laggard in this sector, with funds preferring Rio Tinto.
Real Estate: Also underweight overall as a sector, and only 22% of funds are overweight.
And the sectors held overweight:
Healthcare: The largest overweight, with the majority of funds overweight, though trimmed over the past six months. CSL is the deepest and broadest single name but took the biggest single-stock cut of the month, while ResMed is the second-largest healthcare overweight, but now held at about half its weight of six months ago.
Consumer Staples: The second-largest overweight, with most funds overweight. Coles is better held than Woolworths.
Industrials: The biggest building of weight recently, and the only sector to flip from underweight to overweight over the database's history.
Consumer Discretionary: A positive average active weight despite a minority of funds being overweight, driven by a few concentrated positions rather than broad agreement.
Energy: Roughly neutral as a sector but an active area of overweight building. Santos (STO) has risen sharply to its largest position on record and a top overweight name, while Woodside (WDS) has been trimmed back after peaking in February.
Does it make money?
Morgan Stanley tested whether following the cohort's holdings would have made money. It did not. A long-short basket built from the funds' top overweights against their underweights is down around 21% over the sample.
"The core long-defensive / short-banks positioning in the cohort has been on the wrong side of the dominant large-cap move over the period," noted the analysts.
In terms of whether the positioning data predicts returns, they found a clear split. Copying what funds already hold lost money, but following the monthly changes worked. A basket built from the biggest additions against the biggest cuts is up about 17% and has beaten the market in around two-thirds of the time.
In May, the biggest active-weight additions were CBA, Westpac, Metcash, Ventia and Orica. The CBA and Westpac buying was mechanical rather than a change of view, since both stocks had fallen in the index, so funds had to add a little just to keep their underweights from deepening. The largest cuts were CSL, Woodside, Block, Telstra and AGL.
