Key takeaways

• Challenges for active managers are turning into opportunities
• Stockmarkets have become too concentrated
• Portfolios should be diversified away from a single market and sector
• We believe a wider variety of stocks will likely drive market performance in future

The past 10 years or so have been tough for active fund managers (a fund manager who aims to beat their benchmark rather than track it). But while they have faced a multitude of challenges, we believe some of these are now turning into advantages and we believe the stage is now set for them to thrive.

The global economy is going through a change, we believe, with several trends either reversing or shifting gears. These factors are combining to create an environment that we expect to be more conducive for active managers to add value.

The impact of interest rate changes

The first change involves interest rates. The period between the Global Financial Crisis (GFC – in 2007 to 2008 when mortgage markets and then banks crashed) and Russia’s invasion of Ukraine in 2022 was characterised by historically low rates of interest, low inflation and low bond yields (bond yields have an inverse relationship with prices). Growth shares (shares growing faster than the market), in particular, were beneficiaries of this environment. Borrowing costs were negligible and fast-growing tech stocks prospered.

All that has changed in the past few years. Central banks in the US, UK and Europe began hiking interest rates rapidly in 2022, and as a result, we are now in a much more ‘normal’ rate environment once again.

Borrowing costs have risen, so companies with strong balance sheets have a clear advantage over weaker competitors. We expect to see a wider spread of returns within and across asset classes and greater differentiation between winners and losers. We believe this should create more opportunities for active managers to beat the market by backing those winners and avoiding the losers.

Concentrated stock markets?

Another colossal change is how concentrated stock markets have become. In the 15 years between June 2010 and June 2025, the US has ballooned from 42% to 64% of the MSCI All Country World index, which covers large and medium sized companies over 23 developed and 24 emerging markets¹. The largest 10 companies in the world have gone from 8% to 22% of the global index². Put another way, more than a fifth of the global stock market consists of just 10 companies. Global stockmarkets and the funds that track them are not as global or as diversified as investors might expect them to be.

Many international investors now have a significant chunk of their portfolios in the US – not just within their equity allocation but in bonds and other asset classes as well. In light of the more unstable political environment in the US and the spiralling budget deficit, this may no longer be the safe bet it has been for the last decade.

Market concentration is especially apparent in the US, where the largest 10 companies now account for 38% of the market capitalisation and 30% of earnings³.

Nvidia alone is larger than the UK equity market, with a £2.8trn market cap versus £2.7trn⁴ for the FTSE 100.

Narrow markets, in which a handful of large companies are responsible for the bulk of returns, are hard for active managers to beat. At the start of 2024, a US equity manager would have had to hold 28% in the ‘Magnificent Seven’ stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) just to match the S&P 500’s (the US index of top companies) exposure, including 7% a piece in Apple and Microsoft, according to investment platform AJ Bell⁵.

Consequently, if an active manager wanted to express a particularly confident view in Apple or Microsoft by going overweight (buying a greater percentage for a portfolio than the index holds), he or she would have needed to put more than 7% of their fund in either of these stocks.

How are active managers investing?

Many true active managers, however, want to look for the winners of tomorrow rather than yesterday and endeavour to find less well-known opportunities that are cheaper. As such, they tend to own less of the largest shares in the benchmark, especially when those shares take up such a huge proportion of the index.

A broader market where a wider variety of shares are performing well is a much more conducive environment for active managers to thrive and this is precisely where we expect the global stockmarket to be headed.

Stockmarket upheaval so far this year has led to a change in investment performance. The announcement of tariffs (taxes on imports into the US) back in April unleashed a wave of volatility in shares and bond markets and although they have recovered since then, we expect uncertainty over tariffs and US policy announcements to continue.

In this environment, we believe that active fund managers who focus on how much they are paying for the companies in which they invest, and who are not swayed by stories and hype, should be well placed to deliver results.