The Wall Street "Stock Picking Myth" Continues to Fade: Only 13% Outperformed the Index in the Past Decade

Data once again proves that the halo of active stock selection is fading. Over the past decade, just over 10% of actively managed large-cap US stock funds have outperformed the index—this is the latest data provided by Wall Street.

According to the latest data from Morningstar on August 15, as of June 30 this year, only 13% of actively managed large-cap US equity funds outperformed their benchmark passive funds after fees over the past decade. Even over the past year—a shorter time frame—the outperformance rate was only 27%, less than 30%.

Meanwhile, low-cost passive ETFs are expected to see net inflows surpass $1 trillion for the first time this year, as active funds continue to lose market share.

Continuous Outflows as Active Funds Face a "Bleeding" Dilemma

Fees from actively managed funds were once the core profit source for the asset management industry for decades. But since 2015, they have experienced net outflows year after year.

Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors, stated bluntly: “If you look at actively managed equity mutual funds, every year since 2015 has seen continued net outflows. This is a persistent losing trend—the only comparable case might be the New York Jets (a perennial bottom NFL team).”

There has been a fundamental shift in asset flows. According to data from the Investment Company Institute, the total assets of index-tracking funds matched those of active funds for the first time in 2020, and now are nearly twice as large. Prior to the 2007 financial crisis, active equity funds’ assets were more than three times those of passive strategies.

Wall Street Promotes the “Stock Picking Era”, but Data Disagrees

Despite underwhelming performance, Wall Street’s marketing rhetoric has not slowed down.

Many institutions have recently highlighted the logic of active investing in their market outlook materials: High interest rates have ended the era of “cheap money lifting all boats,” the AI boom will create significant winners and losers, making stock selection critically important.

T. Rowe Price claimed: “Market conditions have shifted in favor of active investing.” Janus Henderson said 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 participate and join the ranks of passive moneymakers.”

This judgement is not entirely unfounded. This year, dispersion in the performance of individual stocks (i.e., "spread") has surged to levels not seen in decades—at least in theory, this should be ideal ground for active managers to outperform low-fee index strategies.

Yet in reality, both the S&P 500 and Nasdaq 100 are weighted by market cap, with the outsized returns of a small number of “superstar” companies continuing to dominate overall performance. According to Dow Jones market data, the top ten constituents of the S&P 500 now account for over 40% of the index’s total market value—the highest concentration since the 1960s.

With Overconcentration, Active Managers “Dare Not Bet”

The highly concentrated structure of the indexes leaves active fund managers in a dilemma.

Holly Framsted, product head at Capital Group—one of the world’s largest active fund firms—explained: “Such a level of concentration is broadly considered too extreme for most portfolios. You have to recognize that if you make the wrong judgment on this theme, the risks are enormous.”

She also pointed out that when comparing active and passive outcomes, 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 rallying, but are simply reluctant to concentrate bets so narrowly—if they’re wrong, the consequences are unbearable.

Bonds Are the Exception

Not all active management strategies are performing poorly. The bond market is a clear bright spot.

Morningstar data shows that, over the past year, 66% of the largest actively managed intermediate-term core bond funds have outperformed their benchmarks, a majority trend maintained for three consecutive years. Actively managed fixed income ETFs are also growing faster than passive bond funds.

Bartolini from State Street suggests that investors considering active management should look beyond large-cap stocks: “You can use ETFs to gain equity beta with very low fees and tax efficiency, then allocate your active budget to areas where there may be more opportunities, such as fixed income.”