Over the past two years, a key driver of top performance for mutual funds was how big their exposure was to the big technology and Internet companies such as Microsoft (MSFT) and Apple (AAPL).
As these technology and communications stocks rallied, many funds rode the rising tide higher, leading to organically higher portfolio positions in these sectors. The average U.S. stock-fund allocation to the communication services and information technology sectors rose to 28.6% at the end of August 2020 from 24.7% in October 2018. More specifically, funds ended up holding much larger positions in software, semiconductor, and IT service stocks.
But some funds went even further, increasing their exposure well above the market indexes against which funds measure their portfolio weightings and performance—in some cases, adding another 10% of their portfolio to these stocks beyond the increase in the index holdings.
For most of 2020, a higher exposure to