Tech boom forces US funds to dump shares to avoid breach of tax rules
Large investment funds run by groups such as Fidelity and T Rowe Price are being forced to offload shares to avoid getting into trouble with US tax authorities, as this year’s lopsided stock market rally has pushed them up against strict limits requiring them to maintain diversified portfolios.
The Internal Revenue Service requires that any “regulated investment company” — which includes the vast majority of mutual funds and exchange traded funds — keep the combined weight of large holdings to less than 50 per cent of their overall portfolio. A large holding is anything that accounts for more than 5 per cent of assets.
Historically, the limit has mainly been a concern for specialist managers that run explicitly concentrated funds, but recent gains for the largest US tech companies means stockpicking investors that want to take even a slightly overweight position relative to an index in companies such as Nvidia and Microsoft are in danger of breaching the rules.
The trend highlights the unusual nature of the recent market rally, which has driven the S&P 500 and other indices to near-record levels of concentration. It also creates yet another challenge for active fund managers, most of whom have struggled to outperform surging indices.
