Just 13% of US large-cap stock pickers beat benchmarks over decade

Only 13% of actively managed US large-cap equity funds beat their passive benchmarks over the decade through June, Morningstar data show, extending a stretch of underperformance that has pushed investor money into index funds.

"That amount of concentration is broadly viewed as too deep for most portfolios," said Holly Framsted, head of product group at Capital Group, one of the largest active-fund managers. "It's really important to recognize that if you get the direction of travel on that theme wrong, the risk is outsized."

Performance improved over the 12 months ended June 30, with 27% of active large-cap funds beating passive counterparts, but roughly seven of every ten still lagged the market benchmark. The S&P 500's 10 largest companies now represent more than 40% of the index's value, the highest concentration since the 1960s, according to Dow Jones Market Data.

The gap is accelerating a structural shift in investor behavior. US index-tracking funds pulled even with active funds in total assets in 2020 and now hold almost twice as much money, a reversal from 2007, when active equity funds outnumbered passive strategies by more than three to one. Low-cost passive ETFs are on pace to attract a record $1 trillion in net inflows this year.

Concentration Defeats Stock Pickers

Fund managers have argued that the end of cheap money and the rise of artificial intelligence created a stock picker's market, where security selection should matter more. Stock-market dispersion — the divergence in performance between individual stocks within the same index — has soared to its highest level in decades this year, a condition that in theory favors skilled managers. T. Rowe Price declared conditions have shifted to favor active investing, while Janus Henderson said AI makes active stock selection increasingly important.

The problem lies in how major benchmarks are constructed. The S&P 500 and Nasdaq 100 are weighted by market value, so outsize gains from a handful of technology companies continue to drive index returns. Many active managers are reluctant to match that level of concentration, given the risk of placing such a large share of a portfolio in a single sector. That caution has left them trailing as the largest technology stocks climbed.

Bonds Tell a Different Story

Fixed income offers a counterpoint. About 66% of intermediate core bond funds — the largest category — outperformed their benchmarks over the past year, and a majority have done so for three consecutive years, according to Morningstar. Active fixed-income ETFs have also been growing faster than their passive counterparts.

"If you look at active equity mutual funds, they've had outflows every year consistently since 2015," said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors. "That's a losing trend only compared to the New York Jets."

Bartolini suggested investors consider a hybrid approach: use low-cost ETFs for broad equity exposure and direct active-management budgets toward areas offering better odds of outperformance, such as fixed income. "You can go get stock-market beta with ETFs in a very fee-efficient and tax-efficient manner, and then use your active budget elsewhere where there might be more opportunities, like fixed income," he said.

The shift carries consequences for fund managers and their parent firms. Active equity mutual funds have bled assets for a decade, pressuring fee revenue even as total industry assets grow. For investors, the data argue for indexing the core of a large-cap portfolio while reserving active management for segments where the odds are better — a calculus that, in small-caps, has historically favored stock pickers. An analysis by Otto Money found active small-cap funds beat their benchmark in 90 percent of seven-year windows, with a median advantage of 3.3 percent a year, versus a 1 percent annual shortfall for active large-cap funds.

This article is for informational purposes only and does not constitute investment advice.