For diversified fund managers, the most dreaded predicament is seeing their investment portfolios overwhelmingly dominated by just seven technology companies—all U.S.-based, mega-cap, and concentrated within the same sector of the economy. Yet, as the S&P 500 hit another record high this week, investors were forced to confront a harsh reality: keeping pace with the market largely necessitates a heavy allocation to these very stocks. In 2025, a small, tightly-knit group of tech super-giants once again delivered a disproportionate share of returns—a pattern now persisting for nearly a decade. The truly noteworthy aspect is not merely the familiar list of winners remaining unchanged, but the fact that this performance gap is testing investors' patience with unprecedented intensity.
Frustration dictates capital flows. Estimates from the Investment Company Institute (ICI) indicate that approximately $1 trillion flowed out of actively managed stock mutual funds for the full year, marking the 11th consecutive year of net outflows and, by some measures, the most severe of this cycle. In contrast, passive stock exchange-traded funds (ETFs) attracted over $600 billion in inflows.
As the year progressed, investors began a gradual retreat—re-evaluating whether it was worth paying extra for portfolios that deviated significantly from the index. Upon review, however, they found that such differentiated strategies not only failed to deliver the expected returns but also left them facing the awkward predicament of "paying a premium for no performance," ultimately forcing them to passively accept the consequences of a failing strategy.
Dave Mazza, CEO of Roundhill Investments, stated, "This concentration makes it harder for active managers to outperform. If you aren't at least benchmark-weight in the 'Magnificent Seven,' you are likely facing significant underperformance risk." Contrary to commentators who believe stock-picking can shine, the cost of deviating from the benchmark remained prohibitively high throughout the year.
The rally's narrow breadth was stark. Data compiled by BNY Mellon Investment Management showed that on many trading days in the first half of the year, fewer than one in five stocks advanced in line with the broader market. A narrow rally itself isn't unusual, but its persistence is key. When gains are repeatedly driven by an extremely small number of stocks, diversification ceases to aid relative performance and instead begins to drag it down.
The same phenomenon was evident at the index level. For the full year, the S&P 500 outperformed its equal-weight version, which assigns the same weighting to a small retailer as it does to Apple Inc. (AAPL.US). For investors assessing active strategies, this boiled down to a simple arithmetic problem: either choose a strategy underweight in mega-caps and risk lagging, or choose one that closely mirrors index weights but struggles to justify fees for an approach nearly identical to passive funds.
Public data shows that a staggering 73% of U.S. equity mutual funds underperformed their benchmark indices in 2025, the fourth-highest proportion since 2007. This underperformance was particularly pronounced during the market rebound following April's tariff scare—the ongoing fervor around artificial intelligence further solidified tech stocks' leading advantage.
Of course, there were exceptions, but these required investors to embrace entirely different risks. One of the most notable examples came from Dimensional Fund Advisors LP, whose $14 billion International Small Cap Value portfolio returned just over 50% for the year, outperforming its benchmark, the S&P 500, and the Nasdaq 100. The portfolio's structure is instructive. It holds roughly 1,800 stocks, almost entirely outside the U.S., with heavy concentrations in financials, industrials, and materials. Rather than trying to navigate around the U.S. large-cap index, it operates largely outside of it.
Joel Schneider, Deputy Head of Portfolio Management for North America at the firm, said, "This year was a good lesson for us. Everyone knows global diversification makes sense, but actually sticking with it is hard. Chasing yesterday's winners is not the right strategy."
Margie Patel, portfolio manager of the Allspring Diversified Capital Builder Fund, exemplifies sticking to one's convictions. The fund returned approximately 20% for the year, benefiting from bets on chipmakers Micron Technology (MU.US) and AMD (AMD.US). Patel noted, "Many people like implicit or quasi-indexing. Even if they aren't confident they can outperform, they want exposure across sectors." In contrast, her view is straightforward: "Winners keep winning."
The trend of large caps getting larger made 2025 a potentially fruitful year for bubble hunters. The Nasdaq 100 traded at a price-to-earnings ratio exceeding 30 and a price-to-sales ratio around 6, both at or near historical highs. Dan Ives, an analyst at Wedbush Securities who launched an AI-focused ETF (ticker: IVES) in 2025, has seen it rapidly grow to nearly $1 billion in assets. He argues that such valuations might cause anxiety but are no reason to abandon the theme. "There will be white-knuckle moments, but those moments create opportunity," he said in an interview. "We believe this tech bull market has another two years to run. For us, the key is identifying the indirect beneficiaries; that's how we continue to play the Fourth Industrial Revolution from an investment perspective."
Other success stories benefited from a different form of concentration. The VanEck Global Resources Fund, returning nearly 40% for the year, capitalized on demand linked to alternative energy, agriculture, and base metals. Launched in 2006 and holding companies like Shell (SHEL.US), Exxon Mobil (XOM.US), and Barrick Gold (GOLD.US), the fund's management team includes geologists, engineers, and financial analysts. "As an active manager, this allows you to chase big themes," said Shawn Reynolds, a geologist who has managed the fund for 15 years. However, this approach also requires strong conviction and a tolerance for volatility—qualities many investors have shown less appetite for after years of uneven performance.
By the end of 2025, the core lesson for investors was not simply that "active management has failed," nor that "indexing has solved all market problems." The lesson was simpler, yet more disquieting: after another year of concentrated gains in tech stocks, the cost of deviating from the mainstream strategy remained punishingly high. For many investors, the willingness to continue paying a premium for "non-mainstream positioning" has significantly diminished compared to previous years.
Nevertheless, Othmane Ali of Goldman Sachs Asset Management believes "alpha" opportunities exist beyond mega-cap tech. The Co-Head of Global Quantitative Investment Strategies relies on the firm's proprietary models, which rank and analyze approximately 15,000 global stocks daily. This system, built around the team's investment philosophy, has helped its International Large Cap, International Small Cap, and Tax-Managed funds achieve collective returns of around 40%. He stated, "The market always gives you something; you just need to look at it in a very calm, data-driven way."
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