Asset managers with active strategies, which is basically all of them, continue to face unfortunate evidence of underperformance. In 2025, for instance, 79% of active large-cap U.S. equity funds underperformed the S&P 500, which increased from 65% in 2024. Despite the argument that large-cap equity is one of the more efficient areas of the market and therefore more difficult to outperform, no equity or fixed-income category had a majority of funds outperform once the timescale reached 15 years, ending in 2024. Large cap was just one of the worst offenders, with underperformance exceeding 90%. And funds that do outperform have trouble maintaining their stature, as seen below. Of the large-cap funds that performed in the top half of their investment category in 2021, fewer than 5% remained there in each of the next four years, a lower rate than random chance would produce. As S&P states, this means when outperformance does happen, it’s often luck rather than skill.
Yet no one should expect firms to take this information and conclude that active funds are not worth having. Ignore the fact that passive funds bring in little revenue thanks to a race to the bottom in fees led by Vanguard, and you’re left facing down the reality that just a few firms, including Vanguard, hold the keys to the passive investing castle: a castle that sports a wide moat. Smaller firms and other competitors must therefore sell their worth to advisors and investors through a different lens rather than strictly one of outperformance. This is not to say that firms do not still promote traditional stock-picking funds as a means to outperform various indices, but it does mean that the aforementioned data makes that line of marketing less convincing than it may have once been.
Novel marketing approaches abound, with firms taking new angles to promote products that sit outside passive funds. Some use the outperformance of passive to their benefit, while others lean into tendencies of the human psyche to gain investment.
Smart beta funds, which also fall under the name of factor investing and systematic active investment, marry index investing with rules that allow funds to zhuzh their holdings without deviating too far from the pride of efficient-market aficionados. DFA and Avantis represent an arm of this through their adherence to research-driven factor approaches that lean toward companies with high profitability and value metrics, among other factors.
While the argument made by firms DFA and Avantis is that factor investing or smart beta has the opportunity to outperform, Hartford Funds leans instead into the risk side of the argument. By incorporating its methodology, it argues, advisors and investors can reduce the risk in their portfolio, as it suggests on its Systematic ETFs page. This argumentative track allows the firm to excuse itself from a one-to-one comparison with passive funds, because overall performance is not the only goal. If the firm can reduce volatility, and downside swing, through its approach, advisors and investors may be willing to concede reduced return. As the firm says, its approach can “potentially lead to better results.” This is very different from saying it can lead to outperformance. Better results, for a risk-wary investor, could be reduced downside in a bear market rather than capturing all the reward of a bull market.
Many firms across the industry seem to understand this benefit of tapping into investors’ loss aversion. With people valuing the reduction in loss roughly double the opportunity for gain, as discovered by Kahneman and Tversky, the framing of reduced downside capture is ripe for picking by astute firms. This is especially true in a market that could be seen as teetering on all-time highs, with the potential to soon fall from those heights.
The boom of pricey buffer ETFs speaks to this, but even funds with a long history, such as Capital Group’s American Mutual Fund, use language promoting downside resilience, such as “has the potential to provide downside resilience during market declines.”
One of the chief ways firms are leaning into the potential downside protection of active funds is through the concentration discussion. The United States stock market is hyperconcentrated, the argument goes, and therefore if just a few companies fall, so too will the index tracking them, and the funds tracking that index. AllianceBernstein touches on this specifically in a commentary titled Allocate with Intent: Active Equity Strategies for Changing Markets. It addresses the underperformance of active management but quickly makes the pivot into the risks of passive investments, stating that passive investing “typically leads to reduced diversification at the total portfolio level and increased exposure to single market, single theme risks.” Invesco offers a similar argument in the promotion of its S&P 500 Equal Weight ETF (RSP).
Asset managers continue to adapt to market realities, and as the market enters new seasons, new opportunities will arise for the promotion of funds that charge higher expense ratios. Some of these arguments will be convincing enough to advisors and investors to gain inflows. Others will not.
Corporate Insight will continue to monitor how firms position themselves in the face of changing circumstances, from the evolution of asset management sites to resource gating. Learn more about our asset management research and download a report sample here.
Tim Drugan
Tim Drugan is an analyst on CI's asset management research team.