Bad News for US Tech Stocks: Large Funds Hit Holding Limits!

Is the momentum of the continuous rise in technology stocks gone?

On July 18th, the Financial Times reported that large investment funds in the United States are facing a major problem under the decentralized investment rules of the Securities and Exchange Commission (SEC): they can no longer increase their holdings in the current hot stocks. This also means that these large funds are finding it difficult to continue chasing the stock indices driven by a few large technology stocks.

Currently, major asset management companies including BlackRock, JPMorgan Chase, American Century Investments, and Morgan Stanley are all facing strict regulatory restrictions, which mainly target funds registered with the SEC as "diversified".

According to the SEC's requirements, mutual funds registered as "diversified" cannot invest more than 25% of their assets in their top holdings (which are stocks that account for more than 5% of the fund's portfolio).

The SEC stipulates that if the market value of these large stocks held by the fund exceeds the 25% limit, these funds will not be penalized; however, the funds cannot continue to increase their holdings in these top holdings.

For example, BlackRock's Technology Opportunities Fund is prohibited from increasing its holdings in stocks of Apple, Microsoft, and NVIDIA, and JPMorgan Chase's Large Cap Growth Fund holds stocks of Microsoft, Apple, NVIDIA, Alphabet, and Amazon that exceed the limit.

The trend of large funds reaching the limit of their holdings also indicates that the situation of the stock market being driven by only a few large companies is becoming more and more intense.

Stephen Cohen, a partner at Dechert law firm, said that for any fund that inadvertently violates the regulations, the most likely outcome is that the SEC will force them to comply with the regulations again. However, funds that suffer losses due to breaches may also face legal action from investors.

On July 24th, the Nasdaq 100 Index (referred to as "Nasdaq 100" for short) will undergo its first-ever "special rebalance" to address the issue of excessive concentration in the index by redistributing weights.

The unprecedented rule modification by Nasdaq is closely related to the continuous rise of technology giants. Can the regulatory authorities tolerate the surge in technology stocks this year?

On July 11th, Cameron Lilja, Vice President and Global Head of Index Products and Operations at Nasdaq, stated in an interview with Bloomberg that this adjustment to reduce the concentration of the index is purely from a regulatory perspective.