Morningstar data show that only 13% of actively managed U.S. large-cap equity funds outperformed comparable passive funds over the 10-year period that ended in June. Over the most recent 12 months through June 30, the share of active large-cap funds that bested their passive counterparts rose to 27%, but the longer-term record remains weak.
Fund managers point to a changing market backdrop - specifically higher interest rates and the emergence of artificial intelligence as an investment theme - as factors that could make stock selection more rewarding. Industry data, however, underline the difficulty active managers face in translating those conditions into consistent outperformance.
Volatility in relative returns among individual stocks inside major indexes has increased to levels not seen in decades, a development that in theory widens the opportunity set for stock-pickers to identify winners and avoid laggards. Despite that dispersion, returns for the S&P 500 and the Nasdaq 100 continue to be concentrated in a small group of highly valued technology companies.
According to Dow Jones Market Data, the 10 largest companies in the S&P 500 now account for more than 40% of the index - the highest concentration reported since the 1960s. Many active managers are unwilling to mirror that degree of concentration because it would require assigning a very large share of a portfolio to a single sector or investment theme. When the largest technology stocks keep rallying, that reluctance can leave active funds trailing the benchmark.
The strong performance and market share of a small cohort of mega-cap technology names has accelerated the migration of investor assets from actively managed mutual funds into exchange-traded funds that tend to be lower cost and more tax efficient. Passive U.S. funds first matched active funds in total assets in 2020 and now hold nearly twice as much in aggregate, per data from the Investment Company Institute.
Low-cost passive ETFs are on track to attract a record $1 trillion in net inflows this year, reflecting how investors are reallocating core equity exposure toward cheaper, index-based vehicles.
Active managers have not been uniformly unsuccessful across asset classes. In fixed income, active performance has been stronger: about 66% of intermediate core bond funds outperformed their benchmarks over the past year, and a majority have done so for three consecutive years.
Asset managers such as State Street Global Advisors have suggested that investors can combine low-cost ETFs for broad equity exposure with a targeted allocation of active-management budgets to areas where managers have historically had better odds of outperformance, including certain segments of the bond market.
Market-level statistics and asset flows point to a structural shift in how investors allocate capital between passive and active strategies, particularly for large-cap U.S. equities. That shift is occurring even as some active managers argue that the current macro and technological environment provides fertile ground for stock selection.