Historical Challenges Revisited

Many observers note that large cap active managers have often struggled to outperform their benchmark indexes. This was one of many insights we discussed in our recent blog“Why Not Both? Blending Active and Passive Management.” We specifically called out large growth managers as having some of the most severe challenges.

Could the Tide Be Turning?

The graph below highlights how the returns of mutual funds in the Lipper US Large Cap Growth category compare to the returns of the Russell 1000 Growth Index, a commonly used large growth benchmark. The blue triangles place the Russell 1000 Growth Index within the universe of large growth funds. When the blue triangle is lower on the graph, fewer actively managed funds are outperforming the Russell 1000 Growth Index. On the far left of the graph, the 10-year underperformance of active managers is apparent, with only 10% of active managers outperforming. Also, for the trailing 1-, 3-, and 5-year periods, the vast majority of active managers underperformed. However, for the first two months of 2025, a much greater percentage – 72% – of large growth managers are outperforming the index.

Large Cap Growth Funds vs. Russell 1000 Growth Index

Source: LPL Research, FactSet 02/28/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested directly.

Possible Explanations

In the following discussion, we provide possible explanations for the year-to-date comeback for actively managed large growth funds. The “What’s Different?” table provides supporting facts and figures.

• Large growth stocks, as measured by the Russell 1000 Growth Index, have declined year to date, after strong gains in prior periods.Many active managers often have portfolios with less risk than their benchmark index, which may cause underperformance in up-markets and outperformance in down-markets. Sometimes this occurs because funds hold a portion of assets in cash to meet redemptions if fundholders sell their shares.
• Higher-risk stocks recently switched from outperforming to underperforming. Stocks with at least 50% more risk than the overall market, as indicated by a beta of 1.5 or more, had strongly outperformed the index for the one-year period and are now strongly underperforming year to date. In our long history covering active managers, we find they are often reluctant to invest in high beta stocks to the same degree they are present in the indexes.
• The 10 largest holdings in the Russell 1000 Growth Index have switched from outperforming to underperforming. The index is quite top-heavy, with the top 10 stocks accounting for 59% of assets, since the index is weighted according to company size as measured by market capitalization. Thus, the returns of the index rely heavily on its top holdings. The returns of active managers depend on how the managers have weighted the stocks in their portfolios, which are often less concentrated. For the trailing one-year period, the average return of the top 10 stocks in the index was 29.3%, outperforming the overall index. However, year to date, the average return of the top 10 stocks was -4.7%, underperforming the overall index.
• Change in sector leadership.For the trailing one-year period, the strongest performing sectors (among those with at least 10% weighting in the Russell 1000 Growth Index) were communication services, consumer discretionary, and information technology. Likewise, strong performing sectors year to date include energy, healthcare, and consumer staples, while the technology and consumer discretionary sectors in the index generally had negative returns. While a change in sector leadership of this type does not always favor active management, the improved performance of sectors often perceived as defensive (healthcare and consumer staples) seems to be an important story benefiting certain active managers.

What’s Different?

Source: LPL Research, FactSet 02/28/25

Is This a Trend?

While it may be too early to call this a shift in trend, the stronger recent performance of large growth managers (relative to the index) is eye-catching after a long period of underperformance. An important principle of investing is to avoid assuming that history will necessarily repeat itself. It is certainly true that the long-term record of large growth managers is underwhelming. It is also important to consider the context that existed when they were performing poorly and the context in place now that they are performing relatively well. Investors who expect the market to continue to broaden, with stocks other than the largest-cap and highest-beta stocks starting to shine, may want to consider actively managed large growth funds positioned in this way. Certain active managers may also get a relative performance boost if the recent market decline worsens or if lower-risk stocks and defensive sectors outperform.

Key Points

Over long-term periods, active managers in the large growth category have struggled to outperform the Russell 1000 Growth Index. Based on returns data alone, it is understandable that some long-term investors favor passively managed portfolios for a portion of their large growth portfolios. However, recent signs of life for actively managed large growth managers highlight the importance of market context. Active managers whose relative performance was hampered during strong up-markets dominated by a handful of stocks may perform better in a lower-return environment or a broadening market that benefits a greater variety of stocks.