Mutual Funds Remain Structurally Underweight in Softlines Retail, Evercore ISI Says

Major institutional investors remain significantly underweight in the U.S. softlines retail sector, a structural trend that has persisted for three years as capital continues to favor high-flying technology stocks, according to a new analysis from Evercore ISI.

Funds Maintain Distance

The report highlights that the 25 largest mutual funds within the S&P 500 have consistently held a lower-than-benchmark allocation to softlines retail stocks. This pattern has been in place for the last three years, signaling long-term caution from large-cap managers.

As of the end of June, the collective holdings in the sector stood at approximately 76% of its weight in the benchmark index. According to Evercore ISI, this level of underweighting remained relatively stable throughout the second quarter.

Tech Sector's Gravitational Pull

The primary driver behind this allocation trend is the sustained outperformance of the technology sector. The growing investor focus on areas like artificial intelligence has diverted funds that might have otherwise flowed into consumer-discretionary sectors like retail.

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This shift is reflected in the sector's shrinking presence in the broader market. The softlines retail sector's weight in the S&P 500 fell by 14 basis points from March to the end of June and has declined by 25 basis points over the last three years, the analysis noted.

Investor Implications

Despite the broad underweighting, some specific companies are seeing shifts in institutional positioning. The report identified off-price retailer Ross Stores (ROST) as a recent beneficiary of portfolio adjustments within these large mutual funds.

This structural underweighting suggests that any significant rotation out of technology and into consumer-focused stocks could lead to a re-evaluation of these allocations. For now, however, the dominant tech trade continues to influence fund flows away from the softlines space.