Hedge Fund Activity in Tech Giants: What Davis Selected Advisers' Move on Microsoft Reveals About Market Sentiment and Strategic Positioning

In the ever-shifting landscape of global markets, the actions of institutional investors often serve as barometers for broader economic sentiment. The recent reduction of Davis Selected Advisers' stake in Microsoft—a move reflected in multiple 13F filings—offers a compelling case study in how hedge funds are recalibrating their exposure to tech giants. This shift, while seemingly technical, reveals deeper currents in investor psychology, portfolio strategy, and the long-term outlook for the technology sector.

Portfolio Reallocation: A Signal of Valuation Concerns

Davis Selected Advisers, a firm synonymous with value investing, has long prioritized durable, well-managed businesses trading at a discount to intrinsic value. Its decision to cut Microsoft's weight in the Selected American Shares Fund from 1.4% to 0.2% in a single quarter—despite Microsoft's 7.4% presence in the S&P 500—speaks volumes. The fund's weighted average forward P/E ratio of 14.8x, compared to the S&P 500's 23.1x, underscores a deliberate tilt toward undervalued stocks. Microsoft, with its high-growth multiples, appears to have fallen out of favor in this framework.

This reallocation aligns with a broader trend: as tech stocks have surged, many value-oriented managers are reassessing their exposure. Microsoft's share price, up 35.55% in the first half of 2025 alone, has pushed its valuation into territory that even its most ardent proponents might deem stretched. For a firm like Davis, which thrives on margin of safety, such metrics are hard to ignore.

Investor Psychology: Growth vs. Value in a Polarized Market

The divergence between growth and value investing has never been more pronounced. While Microsoft's dominance in cloud computing and AI has justified its premium valuation, the broader market is increasingly split. Davis's move reflects a skepticism toward extrapolating growth at any price—a skepticism rooted in historical caution.

Consider the institutional ownership data: 82.91% of Microsoft's shares are held by institutions, many of which are now grappling with the same valuation questions. The liquidation of positions by entities like Kieckhefer Group LLC and the 6.91% reduction by Granite Investment Partners signal a coordinated reassessment. These actions, though varied in scale, collectively point to a recalibration of risk tolerance in the face of elevated valuations.

Yet, this is not a rejection of tech as a sector. Rather, it is a strategic pivot toward companies where growth is priced more conservatively. The top holdings of Davis's fund—Capital One Financial, Meta Platforms, and Berkshire Hathaway—illustrate this shift. These names, while still large-cap, offer a blend of stability and value that aligns with the firm's philosophy.

Implications for Long-Term Tech Sector Exposure

The question for investors is whether this hedge fund activity signals a temporary correction or a structural shift in tech investing. Microsoft's fundamentals remain robust: its cloud infrastructure, AI capabilities, and recurring revenue streams are unparalleled. However, the market's willingness to pay for these attributes has reached levels that even the most optimistic analysts might find challenging to sustain.

For long-term investors, the key takeaway is the importance of balancing growth potential with valuation discipline. Davis's approach—underweighting overvalued leaders while seeking durable, undervalued businesses—offers a blueprint for navigating this tension. The firm's focus on “durable, well-managed companies” is less about sector bets and more about identifying mispricings, a strategy that could prove resilient in a market prone to volatility.

Strategic Lessons for Investors

1. Valuation Metrics Matter: Even in a bull market, growth stocks must justify their multiples. Investors should scrutinize forward P/E ratios, free cash flow yields, and earnings growth expectations.
2. Diversification Within Sectors: Overconcentration in a single stock or sector, even one as dominant as Microsoft, can expose portfolios to idiosyncratic risks. A diversified approach, weighted toward value, can mitigate this.
3. Long-Term Horizon: Davis's strategy emphasizes patience. While short-term volatility is inevitable, companies with strong fundamentals and attractive valuations often outperform over time.

In conclusion, Davis Selected Advisers' reduction in Microsoft is not a dismissal of the tech sector but a recalibration of its role within a value-driven portfolio. As markets evolve, the interplay between growth and value will remain a defining theme. For investors, the challenge lies in striking the right balance—one that aligns with their risk tolerance, time horizon, and belief in the enduring power of innovation.