The last thing a diversified fund manager desires is to manage a portfolio dominated by just seven tech firms—all American, all megacaps, and concentrated in one economic corner. However, as the S&P 500 hit new highs this week, investors were again confronted with the harsh reality: keeping pace with the market largely meant owning little else.
A small, tightly linked group of tech superstars delivered a huge portion of the returns in 2025, continuing a persistent pattern for nearly a decade. Not only was it notable that the winners remained largely the same, but also the degree to which the divergence began seriously testing investor patience.
Disappointment dictated how money moved. Around $1 trillion was pulled from active mutual funds during the year, estimated by Bloomberg Intelligence using ICI data, marking the 11th year of net outflows and, by some measures, the steepest in this cycle. In contrast, passive exchange-traded funds gained over $600 billion.
The withdrawals occurred gradually throughout the year, with investors revising their purchases of portfolios that looked significantly different from the index, only to face the consequences when that difference did not pay off.
“Concentration makes it difficult for active managers to succeed,” mentioned Dave Mazza, CEO of Roundhill Investments. “If you are not weighting the Magnificent Seven, you are likely risking underperformance.”
Contrary to expert sentiment that suggested an environment where stock-picking could shine, this was a year where the cost of deviating from the benchmark remained stubbornly high.
Narrow Participation
On many days in the first half of the year, less than one in five stocks advanced alongside the broader market, according to data compiled by BNY Investments. Narrow participation itself is not rare, but its persistence is significant. When gains consistently depend on a few, a wider spread of holdings ceases to help and starts hurting relative performance.
The same dynamic was apparent at the index level. Throughout the year, the S&P 500 outperformed its equal-weighted version, which assigns the same significance to a small retailer as it does to Apple Inc.
For investors evaluating active strategies, it boiled down to a simple arithmetic puzzle: select one that undervalues the largest stocks and risks lagging, or hold one that keeps them in close proportion to the index and struggles to justify the fee for an approach that closely mirrors a passive fund.
In the U.S., 73% of mutual funds lagged their benchmarks this year, per Athanasios Psarofagis of BI—the fourth-worst showing since 2007. The underperformance worsened following the recovery from April’s tariff threat, as enthusiasm for artificial intelligence cemented the tech cohort’s lead.
There were exceptions, but they required investors to embrace markedly different risks. One notable instance was Dimensional Fund Advisors LP, whose $14 billion International Small Cap Value Portfolio delivered returns of just over 50% this year, outpacing not only its benchmark but also the S&P 500 and the Nasdaq 100.
That portfolio’s structure speaks volumes. The firm owns about 1,800 equities, nearly all outside the U.S., with heavy exposure to financials, industrials, and materials. Instead of trying to beat the U.S. large-cap index, the firm mostly went beyond it.
“This year offers a really good lesson,” stated Joel Schneider, deputy head of portfolio management for the firm in North America. “Everyone knows global diversification makes sense, but it is very hard to maintain the discipline and actually stick with it. Picking yesterday’s winners is the wrong approach.”
Sticking With Winners
One manager who stayed true to their convictions was Margie Patel of the Allspring Diversified Capital Builder Fund, which returned about 20% this year through wagers on chipmakers Micron Technology Inc. and Advanced Micro Devices Inc.
“Many prefer to be hidden or like indexers. They like having some visibility across all sectors, even if they are not certain they can beat the return,” Patel remarked on Bloomberg TV. In contrast, she believes “winners will keep winning.”
The propensity of large stocks to surge made 2025 notable for potential bubble hunters. The Nasdaq 100 trades at more than 30 times earnings and roughly six times sales, matching or nearing historical peaks. Dan Ives, an analyst at Wedbush Securities who launched an AI-focused ETF (IVES) in 2025 and saw it balloon near $1 billion, says such valuations can test nerves but are not a reason to abandon the theme.
“There will be moments where it’s white-knuckle. It just creates opportunities,” he stated in an interview. “We believe this tech bull market has two more years to run. For us, it is about figuring out who are the beneficiaries of the derivates, and that is how we will continue to navigate this fourth industrial revolution from an investment perspective.”
Thematic Investing
Other success stories stemmed from a different kind of concentration. The VanEck Global Resources Fund returned nearly 40% this year, buoyed by demand linked to alternative energy, agriculture, and base metals. The fund, established in 2006, holds companies like Shell Plc, Exxon Mobil Corp., and Barrick Mining Corp., and is managed by teams that include geologists and engineers alongside financial analysts.
“When you’re an active manager, it lets you engage with the big themes,” said Shawn Reynolds, who has managed the fund for 15 years and is himself a geologist. But this approach also demands conviction and tolerance for volatility—qualities many investors showed less appetite for after several years of uneven results.
By the conclusion of 2025, the lesson for investors was not that active management had ceased to function, and the index had dictated the market. It was simpler and more uncomfortable. After another year of focused ownership, the price of divergence remained high, and for many, the willingness to keep paying it had evaporated.
Nevertheless, Osman Ali of Goldman Sachs Asset Management believes “alpha” can be uncovered beyond the big tech names. The global co-head of quantitative investment strategies relies on his firm’s proprietary model, which ranks and analyzes roughly 15,000 global equities daily. The system, built on the team’s investment philosophy, helped deliver gains of about 40% across international large, small, and tax-managed funds on a total return basis.
“Markets will always offer you something,” he concluded, “You just have to look very dispassionately, in a data-driven manner.”
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