“Rising stock market concentration is challenging for active managers because on average they own stocks with smaller market capitalizations than those in their benchmarks. That means when large-cap stocks do well relative to small-cap stocks, the percentage of mutual funds that outperform the benchmark tends to go down. When small caps outperform large caps, active managers outperform at a higher rate. Exhibit 7 shows this relationship from 1960 to 2023. The striped red dot shows the outcome for 2023.“
