Just 13% of U.S. large-cap stock-picking funds beat benchmarks over decade

Just 13% of actively managed U.S. large-cap equity funds managed to surpass comparable passive funds over the past decade, according to a report by the Wall Street Journal. The data, sourced from Morningstar, indicates that performance improved slightly over the most recent 12-month period, with only 27% of active large-cap funds beating their passive counterparts.

Despite claims from fund managers that favorable conditions such as higher interest rates and artificial intelligence have benefited stock selection, performance gaps between individual stocks within the same index have reached their highest levels in decades. This could suggest there are fewer opportunities for active managers to outperform passive benchmarks.

The S&P 500 and Nasdaq 100, two major U.S. stock indices, continue to be driven primarily by a select group of highly valued technology companies. These 10 largest companies now make up more than 40% of the S&P 500, representing the highest concentration since the 1960s. This concentration in a few stocks raises concerns among active managers, who are wary of the risk associated with allocating such a large portion of their portfolios to a single sector or investment theme.

This hesitancy to match the concentration of the largest technology stocks may contribute to the performance gap between active and passive funds, as active managers may underperform when the largest tech companies continue to rise. As a result, many investors are shifting their focus from actively managed mutual funds to lower-cost, more tax-efficient exchange-traded funds (ETFs).

Passive U.S. funds first matched the assets of active funds in 2020 and now hold almost twice as much money, according to the Investment Company Institute. Moreover, low-cost passive ETFs are projected to attract a record $1 trillion in net inflows this year. Despite these trends, active managers have demonstrated stronger performance in the fixed income market.

Around 66% of intermediate core bond funds have outperformed their benchmarks over the past year, and many have maintained such outperformance for three consecutive years. State Street Global Advisors, a major player in the investment industry, suggests that investors can leverage low-cost ETFs for broad equity exposure while directing their active-management budgets towards areas with a higher likelihood of outperformance, such as bonds.