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

A mere 13% of actively managed U.S. large-cap equity funds managed to outperform their passive counterparts over the past decade, according to the Wall Street Journal's report citing Morningstar data. Despite the recent improvement, only 27% of these funds beat their passive alternatives in the 12 months leading up to June. This underwhelming track record persists despite fund managers claiming that higher interest rates and artificial intelligence have provided favorable conditions for stock selection.

The performance disparities between individual stocks within the same index have reached their highest levels in decades, suggesting that active managers have more opportunities to identify winners and avoid losers. However, the S&P 500 and Nasdaq 100's returns continue to be driven by a handful of highly valued technology companies.

These tech giants now make up more than 40% of the S&P 500, the highest concentration since the 1960s, as per Dow Jones Market Data. Many active managers are hesitant to replicate this concentration due to the heightened risk associated with allocating a significant portion of a portfolio to a single sector or investment theme. Consequently, this reluctance has led to a growing divergence between active and passive funds, accelerating investors' migration towards lower-cost, more tax-efficient exchange-traded funds (ETFs).

Passive U.S. funds first matched active funds in terms of total assets in 2020 and now hold nearly twice as much capital. ETFs, which offer low costs and lower tax implications, are poised to attract a record $1 trillion in net inflows this year. Active managers have performed better in fixed-income investments. Roughly 66% of intermediate core bond funds surpassed their benchmarks over the past year, and many have achieved this success for three consecutive years.

State Street Global Advisors suggested that investors could leverage low-cost ETFs for broad equity exposure and allocate their active-management budgets towards areas that offer a higher likelihood of outperforming, such as bonds.