Key Points

• The US equity market has been driven by a small number of large technology-oriented companies over the past decade.
  
  
• Heightened market concentration has made it challenging for active funds to outperform.
  
  
• If there is a mean reversion in US mega-cap performance, as our capital markets outlook suggests, we would expect active managers to fare better in general over the coming decade.
   

A handful of US technology-related stocks have generated exceptional returns over the past decade, making it hard for active equity funds to outperform. If this concentration unwinds, however, our analysis suggests that active fund managers could fare much better - especially those with strong stock-picking skills outside of the mega-cap tech names.

A decade of US tech stock dominance

Returns for the US equity market have been exceptional over the past decade, as measured by the S&P 500 index of large-capitalisation US companies. The index gained 13.9% per year on an annualised basis (in GBP) from 2015 through to 2024 compared with 12.0% for the period from 1970 through to 2024. By comparison, non-US stocks (as measured by the MSCI AC World ex-USA Index) and US small-caps (as measured by the Russell 2000 Index) lagged the US equity market over the past decade, gaining just 5.3% and 7.8% (in GBP), respectively.

Much of the broad market’s performance has been driven by a small number of large technology-oriented companies, which have included “FAANGM” (Facebook, Amazon, Apple, Netflix, Google and Microsoft) in the past and, more recently, the “Magnificent 7” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla).

As the figure below illustrates, the market-capitalisation share of the 10 largest US stocks has grown over the past decade - by 2024, these stocks accounted for almost 30% of the Russell 1000 Index. As a result, the performance drag from not owning those stocks—almost all of which are tech-related—has grown as well. In 2024, not holding the 10 largest stocks would have resulted in a performance headwind of 8.6 percentage points, the biggest annual drag for the period shown.

Charting the return impact of not owning the 10 largest stocks

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

Notes: Overall period shown is from 31 December 1990 through to 31 December  2024, in GBP. Impacts shown are as at the end of each calendar year. Weights shown are as at the beginning of each calendar year. 

Sources: Vanguard and FactSet.

Large growth funds have been affected the most

Heightened market concentration over the past decade has made it challenging for active funds, particularly large growth funds, to outperform. As the chart below illustrates, large growth funds are generally underweight mega-cap companies and overweight mid-cap, small-cap and global stocks.

Average weightings of actively managed US large-cap funds versus their style benchmarks

Notes: Figure shows the average market cap segment exposure for active equity funds in the Morningstar large value, large blend and large growth categories relative to the corresponding Russell 1000 style index. Morningstar size definitions are used. 

Sources: Vanguard, using data from Morningstar and FactSet, as at 31 December 2024. 

Several factors contribute to the structural underweight of mega-caps in active large-cap funds:
 

• Innovation and growth. Many fund managers believe that large, established companies are less innovative and find it harder to sustain high growth rates compared with smaller, more agile competitors.
  
  
• Alpha opportunities. There is a perception that information is less efficient in small-cap and non-US stocks, leading fund managers to seek greater alpha opportunities in these areas.
  
  
• Regulatory constraints. In the US, the US Investment Company Act of 1940 imposes rules that require diversified funds to limit positions exceeding 5% to less than 25% of the portfolio in aggregate, further contributing to the underweight in mega-caps.
   

The relationship between the performance of mega-caps and the percentage of active funds beating their benchmarks over time is negative. However, value managers have performed well by holding the Magnificent 7¹, which are not part of their style benchmark.

Share of active funds beating their style benchmark

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

Notes: The lines show the percentage of actively managed large-cap equity funds outperforming their corresponding Russell 1000 style index before fees on a rolling 3-year basis for the period from 31 December 1993 through to 31 December 2024, in GBP. The oldest share class of each fund was used. The bars show the rolling 3-year performance difference between mega-cap growth stocks and the market. The proxy used to represent mega-cap growth stocks is the Russell Top 200 Growth Index; the proxy used to represent the market is the Russell 1000 Index.

Sources: Vanguard and Morningstar.

Performance attribution helps us account for market concentration and uncover true skill

The analysis that our team has conducted suggests that the headwind from mega-caps is only a small part of the underperformance story for many funds - and that for others, this headwind has masked good stock-picking elsewhere.

The table below shows performance attribution for two existing large-cap core funds benchmarked to the S&P 500 Index from 2014 through to 2024. Both underperformed the index over the period, but for very different reasons. Fund A had significant exposure to global stocks (about 13% on average) and was underweight mega-caps (about 14% on average). Combined with a cash drag, these tilts created a headwind of 1.6 percentage points, which masked strong stock-picking within the remainder of the portfolio (+1.4 percentage points). Fund B, by contrast, had minimal exposure to global stocks and only a slight mega-cap underweight; most of its underperformance (almost 2 percentage points) came from poor stock-picking.

Two large-cap core funds underperformed, but for very different reasons

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

Note: Data are for 31 December 2014 through to 31 December 2024.

Sources: Vanguard and FactSet.

What past performance suggests about future performance

If the next decade sees mean reversion in US mega-cap performance, as our capital markets outlook suggests, we would expect active managers to fare better in general.

However, not all active funds would benefit equally in such a scenario. Those that, like our Fund A, have had their strong stock selection masked during the last decade by the significant headwinds from an underweight to mega-caps, could be poised to perform best. Conversely, those that are more similar to Fund B could continue to struggle. Value funds that have only outperformed through holding out-of-benchmark mega-cap tech stocks could also disappoint.

As investors reassess their active funds for the coming decade, we believe that making these distinctions about what, exactly, is driving an active fund’s performance will be critical. 

¹ The Magnificent 7 are the seven stocks that have driven much of the market’s returns over the past few years: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. 

Important information

This is directed at professional investors and should not be distributed to, or relied upon by retail investors.

This is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

The information contained herein is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2025 Vanguard Asset Management, Limited. All rights reserved.