Wall Street's "Stock-Picking Myth" Continues to Fade: Only 13% Beat the Index Over the Past Decade

Data once again proves that the allure of active stock picking is fading. Over the past decade, only a little more than one in ten U.S. actively managed large-cap funds beat the index—this is the answer provided by the latest data from Wall Street.

On August 15, according to the latest data from Morningstar, only 13% of U.S. actively managed large-cap funds outperformed their benchmark passive funds after fees over the ten years ended June 30 this year. Even in the short-term window of the past year, the outperformance rate was just 27%, less than 30%.

Meanwhile, net inflows into low-cost passive Exchange Traded Funds (ETFs) are expected to exceed $1 trillion for the first time this year, while the market share of active funds continues to shrink.

Capital Continues to Flee as Active Funds Face a "Bleeding" Crisis

Fees from actively managed funds were once the core source of profit for the asset management industry for decades. But since 2015, capital has seen net outflows year after year.

Matthew Bartolini, Head of Americas Research at State Street Global Advisors' SPDR division, stated bluntly: "If you look at active equity mutual funds, they have experienced continuous net outflows every year since 2015. This is a trend of persistent failure—the only thing comparable to it might be the New York Jets."

Capital flows have undergone a fundamental shift. According to data from the Investment Company Institute, the total assets of index-tracking funds first equaled those of active funds in 2020 and are now nearly twice as large. Before the 2007 financial crisis, the asset size of active equity funds was more than three times that of passive strategies.

Wall Street Pushes the "Era of Stock Selection," but Data Disagrees

Despite performance pressure, Wall Street's marketing rhetoric has not ceased.

Several institutions have recently promoted the logic of active investment in their market outlook materials: higher interest rates have ended the era when "cheap money lifted all boats," and the AI wave will create huge winners and losers, making stock selection crucial.

T. Rowe Price declared: "Market conditions have shifted in favor of active investment." Janus Henderson stated that AI means "active stock selection will become increasingly important." Jefferies CEO Rich Handler wrote in a recent letter to clients: "Active managers can finally join the party and get in on the passive money-making action."

This judgment is not entirely baseless. The dispersion of performance among individual stocks in the equity market this year has surged to its highest level in decades—theoretically, this is the ideal soil for active stock picking to beat low-fee index investing.

However, the reality is that both the S&P 500 and the Nasdaq 100 are market-cap weighted, and the excess returns of a few superstar companies continue to dominate overall performance. According to Dow Jones Market Data, the top ten constituents of the S&P 500 currently account for more than 40% of the index's total market capitalization, the highest concentration since the 1960s.

High Concentration Leaves Active Fund Managers "Afraid to Bet"

The highly concentrated structure of indices has left active fund managers in a dilemma.

Holly Framsted, Product Lead at Capital Group, one of the world's largest active fund management companies, explained: "This level of concentration is widely considered too extreme for most portfolios. It must be recognized that if you misjudge the direction of this theme, the risk will be enormous."

She also pointed out that when comparing active and passive investment results, investors should consider both the degree of diversification and overall portfolio risk.

In other words, active fund managers are not unaware that tech giants are rising, but they dare not place such concentrated bets—once wrong, the cost is unbearable.

Bonds Are an Exception

Not all active management strategies have performed poorly. The bond sector is a clear bright spot.

Morningstar data shows that over the past year, 66% of the largest actively managed intermediate-core bond funds outperformed their benchmarks, a majority that has persisted for three consecutive years. The growth rate of active fixed-income Exchange Traded Funds (ETFs) is also faster than that of passive fixed-income funds.

State Street's Bartolini suggested that investors considering active management should look beyond large-cap stocks: "You can use Exchange Traded Funds (ETFs) to gain equity beta with very low fees and tax efficiency, and then allocate your active budget to other areas where there may be more opportunities, such as fixed income."

Risk Warning and Disclaimer

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