Brutal year for stock picking spurs trillion-dollar fund exodus

The last thing a diversified fund manager wants is to manage a portfolio dominated by just seven technology companies — all American, all mega-capitalized, clustered in the same corner of the economy. However, with the S&P 500 hitting new highs this week, investors have once again been forced to confront a painful truth: keeping up with the market largely means owning little else.

A small, closely interconnected group of high-tech stocks accounted for a large share of returns in 2025, extending a pattern that has been in place for much of the decade. What stood out was not just that the winners remained largely unchanged, but the degree to which the gap began to seriously strain investors’ patience.

Frustration dictated how the money moved. About $1 trillion was withdrawn from active equity mutual funds over the course of the year, according to Bloomberg Intelligence estimates using ICI data, marking the 11th year of net outflows and, by some measures, the steepest of the cycle. In contrast, passive equity ETFs received more than $600 billion.

Exits occurred gradually as the year progressed, with investors reevaluating whether to pay for portfolios that looked significantly different from the index, only to have to live with the consequences when that difference didn’t pay off.

“Concentration makes it difficult for active managers to do well,” said Dave Mazza, CEO of Roundhill Investments. “If you don’t measure the weight of the Seven Wonders, you’re probably risking poor performance.”

Contrary to critics who thought they saw an environment in which stock picking could shine, it was a year in which the cost of deviating from the norm remained stubbornly high.

Narrow sharing

On several days in the first half of the year, less than one in five stocks rose along with the broader market, according to data compiled by BNY Investments. Narrow involvement is not unusual in itself, but its continuation is important. When gains are made repeatedly by too few, wider spread bets stop helping and start hurting relative performance.

The same dynamic was visible at the index level. Over the course of the year, the S&P 500 has outperformed its equal-weighted version, which gives the same weight to small retailers as it does to Apple Inc.

For investors evaluating active strategies, that translates into a simple math problem: Choose one with a lower weighting than larger stocks and risk falling behind, or choose another one that holds you close to the index and struggle to justify paying for an approach that’s little different from a passive fund.

In the United States, 73% of mutual funds lagged their indexes this year, according to Athanasios Psaroufages of Bank International, fourth place in terms of data going back to 2007. The weak performance was exacerbated after a recovery from the tariff scare in April, as enthusiasm about artificial intelligence boosted the technology group’s leadership.

There were exceptions, but they required investors to accept very different risks. One of the most notable such results came from Dimensional Fund Advisors LP, whose $14 billion international small-cap portfolio has gained just over 50% this year, beating not only its benchmark index but also the S&P 500 and Nasdaq 100 indexes.

The structure of that portfolio is telling. It owns approximately 1,800 stocks, almost all of them outside the United States, with significant exposure to financials, industrials and materials stocks. Instead of trying to circumnavigate the US large-cap index, it largely drifted off the index.

“This year provides a really good lesson,” said Joel Schneider, the company’s vice president of portfolio management in North America. “Everyone knows that global diversification makes sense, but it’s really hard to stay disciplined and really sustain it. Picking winners yesterday is not the right approach.”

Stick to winners

One manager who has stuck to her convictions is Margie Patel of the Allspring Diversified Capital Builder Fund, which has returned about 20% this year on bets on chip maker Micron Technology Inc. and Advanced Micro Devices Inc.

“A lot of people like to be hidden or semi-hidden. They like to get some exposure in all sectors even if they’re not convinced they’ll outperform,” Patel said on Bloomberg TV. By contrast, her view is that “winners will stay winners.”

The tendency for large-cap stocks to grow has made 2025 a banner year for would-be bubble hunters. The Nasdaq 100 is trading at more than 30 times earnings and about six times sales, at or near its historic highs. Valuations like those may test the nerves, but they’re no reason to bail on the topic, says Dan Ives, a Wedbush Securities analyst who started an AI-focused ETF in 2025 and has seen it swell to nearly $1 billion.

“There will be difficult moments,” he said in an interview. “This only creates opportunities.” “We think this tech bull market will continue for another couple of years. For us, it’s about trying to find the beneficiaries of financial derivatives, and that’s how we’ll continue to navigate this fourth industrial revolution from an investment perspective.”

Thematic investment

Other successes have turned to a different kind of focus. VanEck’s Global Resources Fund has returned nearly 40% this year, benefiting from demand related to alternative energy, agriculture and base metals. The fund, which was launched in 2006, owns companies such as Shell Plc, Exxon Mobil Corp and Barrick Mining Corp, and is managed by teams that include geologists, engineers and financial analysts.

“When you’re an active manager, it allows you to pursue big themes,” said Sean Reynolds, who has managed the fund for 15 years and is a geologist himself. But this approach also requires conviction and tolerance for volatility — qualities for which many investors have shown less appetite after several years of uneven results.

By the end of 2025, the lesson for investors was neither that active management had stopped working, nor that the index had dissolved the market. It was simpler and more annoying. After another year of concentrated gains, the price of difference remains high, and for many, the desire to continue paying that price has waned.

However, Usman Ali, of Goldman Sachs Asset Management, believes there is “alpha” to be found not just in big technology companies. The Global Co-Head of Quantitative Investing Strategies relies on the firm’s proprietary model, which rates and analyzes approximately 15,000 stocks worldwide on a daily basis. The system, built around the team’s investment philosophy, has helped it achieve gains of around 40% across its international large-cap, international small-cap and tax-managed funds on a total return basis.

“The markets will always give you something. You just have to look in a very dispassionate, data-based way,” he said.

This story originally appeared on Fortune.com

2025-12-27 23:59:00