The terms ‘underweight’ and ‘overweight’ are used in the context of portfolio management to describe how a fund’s position size relates to that of its benchmark.
A fund is underweight if it has less exposure to a particular stock or sector than its benchmark. For example, in the UK, stocks like Royal Dutch Shell and HSBC dominate the FTSE 100 and FTSE All Share indices – both, at the time of writing have index weights in excess of 5%.
If a fund has less exposure to HSBC, say a 3% position, than the FTSE All Share index it is said to be underweight HSBC. This is interpreted as the expression of a negative view of the outlook for HSBC’s shares – the fund manager aims to benefit in relative performance terms by owning less of a falling stock than the benchmark. The decision to exclude HSBC from the portfolio altogether also results in an underweight position, albeit one which is expressed with more conviction.
The same applies at the sector level. If a fund has zero exposure to the oil sector, for example, it is deemed to be significantly underweight that sector. Funds that are managed with a relative return perspective, are unlikely to take such an extreme view, because the risk to relative performance of having no exposure to such a big sector in the index would be deemed too great to bear. Funds that are managed with an absolute return perspective, however, may well be prepared to take such a view if they hold enough conviction to do so.