Brutal year for stock picking spurs trillion-dollar fund exodus

Core Insights - The concentration of returns among a small group of technology stocks, primarily American megacaps, has created challenges for diversified fund managers, leading to significant outflows from active equity mutual funds [1][3][15] Investment Trends - In 2025, a small group of tech super stocks accounted for a disproportionate share of market returns, continuing a trend observed over the past decade, which has strained investor patience [2][15] - Approximately $1 trillion was withdrawn from active equity mutual funds in 2025, marking the steepest outflow in the current cycle, while passive equity exchange-traded funds attracted over $600 billion [3][15] Market Dynamics - The S&P 500 outperformed its equal-weighted counterpart throughout the year, indicating a narrow participation in market gains, with fewer than one in five stocks rising alongside the broader market on many days [5][6] - 73% of equity mutual funds in the US underperformed their benchmarks in 2025, the fourth highest rate since 2007, exacerbated by the tech sector's dominance following the recovery from April's tariff scare [8] Portfolio Strategies - Active managers face a dilemma: underweighting the largest stocks risks underperformance, while closely mirroring the index raises questions about the value of active management [7][15] - Dimensional Fund Advisors' International Small Cap Value Portfolio, which returned over 50% in 2025, illustrates the potential of diversifying outside the US large-cap index [9][10] Thematic Investing - Some funds, like VanEck's Global Resources Fund, achieved significant returns by focusing on themes such as alternative energy and base metals, demonstrating the potential of thematic investing [13][14] - Goldman Sachs Asset Management's approach emphasizes finding "alpha" beyond Big Tech, utilizing a proprietary model to analyze a broad range of stocks, resulting in gains of approximately 40% across various funds [16][17]