(Bloomberg) -- Stock pickers are holding their smallest allocations of megacap names such as Apple Inc. and Nvidia Corp. since the global financial crisis, boosting their funds’ performance in a year that has kicked off with a slide in technology shares.
For more than a decade, active fund managers have struggled to beat the indexes they are benchmarked to. In large part, that’s because their positions in the massive tech names driving markets higher were lighter than the stocks’ hefty weightings in gauges such as the S&P 500.
That disparity held true at the end of December. At the time, the average spread between the active institutional ownership and S&P 500 weighting for the largest US tech companies by market value — Apple, Nvidia, Amazon.com Inc., Alphabet Inc., Meta Platforms Inc. and Microsoft Corp. — was the widest in at least 16 years, according to strategists at Morgan Stanley.
This year, however, that under-allocation is turning out to be a blessing in disguise. With the so-called Magnificent Seven faltering, active investors’ are seeing a performance boost: Roughly 49% of actively managed mutual funds and exchange-traded funds that compare themselves to the S&P 500 are beating the index in 2025, according to Morningstar Direct. That’s up from 38% during the same time last year and far above the 17% outperformance level of the last decade.
“With the ‘Mag 7’ turning into the ‘Lag 7’ this year, that’s giving oxygen back to active managers who are breathing a sigh of relief because traders are rotating into beaten-up value shares and other unloved corners of the market,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management.
High levels of market concentration hurt performance comparisons for stock pickers, who often have to cap their allocations to stocks for reasons including maintaining diversification and managing risk. Last year, just 10 companies accounted for two-thirds of the S&P 500’s $10 trillion gain in market value, according to Birinyi Associates.
Big tech has fared worse so far this year. A Bloomberg gauge of the Magnificent Seven megacaps is down 11% from its Dec. 17 high as of Tuesday’s close, entering a collective correction amid worries the economy is slowing and inflation will pick up.
Meanwhile, some 63% of active large-cap funds beat their benchmarks in January, the biggest outperformance in a year, data compiled by Savita Subramanian, equity & quant strategist at Bank of America Corp., showed.
Big Test
Big tech will face perhaps its biggest test of the earnings season on Wednesday, when artificial-intelligence darling Nvidia reports results after the bell. The chipmaker, whose eye-popping, roughly 170% rally in 2024 was a significant driver of S&P 500 gains, has slumped almost 6% this year.
Another factor may be helping active fund managers in recent weeks: Stocks are moving less frequently in lockstep, with one measure of how much stocks move in unison, Cboe’s 3-Month Implied Correlation Index, near a record low.
Some market participants say such an environment can give stock pickers an edge, with individual names more likely to chart their own course rather than being caught up in sweeping macro rotations that consume the entire market.
That said, weakness in tech stocks has been a fleeting phenomenon in recent years. The Russell 1000 Value Index, which houses bellwethers like Walmart Inc., Procter & Gamble Co. and Philip Morris International Inc., has climbed by 25% over the past 24 months. That pales in comparison to its counterpart — the Russell 1000 Growth Index — which has soared 74% in that span.
“The big risk for active managers is once the market pressure eventually resolves and the Mag 7 rebounds, like we’ve seen time and time again,” said Adam Sarhan, founder of 50 Park Investments. “I see more downside from here for technology — but that could all change if Nvidia blows it out of the park.”
