The dominance of megacap technology stocks, dubbed the “Magnificent Seven,” has become a problem for mutual fund managers seeking to diversify their portfolios. The group — which includes Amazon , Microsoft , Meta , Alphabet, Apple , Nvidia and Tesla — has led the current bull market and 2024’s rally, increasing its representation in market cap-weighted benchmarks such as the S & P 500. This created a tough situation for stock pickers who can’t simply replicate the benchmark weight of these stocks in their funds and therefore are forced to own other underperforming names. “The large index weight of the Magnificent 7 in benchmarks creates a challenge for many fund managers,” Goldman Sachs strategists said in a note. “Diversification guidelines mean that fund managers cannot own the benchmark weight and still be classified as a diversified mutual fund.” MAGS YTD mountain Magnificent 7 ETF The Wall Street firm looked at the quarter-end positioning of 554 large-cap mutual funds with a combined $3.7 trillion in equity assets. It found that core and growth managers were underweight all seven tech giants at the end of the second quarter. As a result, their performance has suffered this year. Overall, just 34% of large-cap mutual funds are outperforming their benchmarks year to date, compared to the historical average of 38%, Goldman said. Meanwhile, 48% of large-cap value funds are outperforming their benchmarks, compared to 34% of growth funds and just 24% of large-cap core funds. Their positioning helped buffer the effects from the summer sell-off in these Magnificent 7 stocks, which declined 17% between July 10 and August. However, these stocks have quickly rebounded from the pullback, challenging the mutual fund performance once again.