The Myth of the Stock-Picker’s Market

When you write about investing for a living, you end up hearing some of the same things over and over, such as:

We try to hit singles instead of swinging for the fences. In the short run, the market is a voting machine, but in the long run, it’s a weighing machine. Don’t put all your eggs in one basket. The trend is your friend. Don’t fight the Fed.

Another frequently heard notion: We think it’s going to be a stock-picker’s market. The idea behind this is that sometimes the market is driven by a rising tide that lifts all boats, or a powerful trend that drives outsize gains in certain areas, such as the recent surge in artificial intelligence-related stocks. But at other times, the thinking goes, there’s a bigger gap between the market’s winners and losers, which gives active managers a better opportunity to add value by choosing the right stocks.

This line of thinking sounds reasonable, but does it hold up in practice?

Examining the Data

I looked at this question back in August 2024, when I compared years with a high dispersion of returns (the span between the highest and lowest performers) among stocks that make up the S&P 500 to see whether actively managed funds fared better when return spreads were wider. (Spoiler: They fared slightly better but still fell behind overall.)

This time, I looked at the same question from a different angle, focusing on the percentage of index constituents that outperformed the overall return for the benchmark in a given year. Then I screened for all actively managed funds that identified the S&P 500 as their performance benchmark. Theoretically, a higher “win rate” for individual stocks within the index should make it easier for active managers to earn higher returns by choosing the right names.

What did I find? There was some evidence of a positive correlation between the win rate of individual stocks and the percentage of actively managed funds that beat the index. As shown in the chart below, funds generally fared better in years with a higher percentage of stocks that came out ahead of the average.

However, the R-squared between the two variables was only 0.19, indicating that the relationship between the two datasets wasn’t all that strong.

Next, I looked at absolute returns to see whether funds had a better win rate during years with lower returns for the index as a whole. This is an easier hurdle to clear, simply because most funds keep at least a small percentage of their assets in cash to meet redemptions. When the market is down, even a small allocation to cash can improve returns. In 2022’s bear market, for example, slightly more than half the funds in my sample group fared better than the benchmark.

But once again, while there was a positive relationship between these two variables, the relationship wasn’t particularly strong.

Then I looked at the trend in actively managed funds’ success rates over time, starting in 1999. The picture wasn’t encouraging. The highest win rate during that period was for the year 2000, when more than two-thirds of actively managed equity funds with the S&P 500 as a bogy came out ahead of that benchmark. But over time, the win rate has generally declined. It averaged 42.4% for the full period but dropped to just 26.7% for the year to date through Sept. 30, 2025.

The three tests above were all based on unweighted data, so a tiny fund with less than $100 million in assets counted the same as mega-funds such as Fidelity Contrafund FCNTX, Dodge & Cox Stock DODGX, and Vanguard Primecap VPMCX. Asset-weighted returns are a better reflection of the typical fund investor’s experience. But the results don’t look much better from that perspective. Morningstar’s Active/Passive Barometer study has consistently found that few actively managed funds have fared better than a composite made up of passively managed funds. That’s particularly true in the large, liquid areas such as US large-cap stocks.

The data discussed above also focuses on how actively managed funds fared from year to year, not how they performed over longer periods. It’s even less common for actively managed funds to consistently outperform over multiple years. Based on data from the Active/Passive Barometer, only 5% of all actively managed large-blend funds pulled ahead of a passively managed composite over the trailing 15-year period through June 30, 2025.

Granted, some portfolio managers are more talented than others. The table below highlights some actively managed funds with above-average Morningstar Medalist Ratings, indicating that Morningstar’s manager research team has confidence in their ability to maintain strong performance.

Conclusion

Overall, though, there’s overwhelming evidence that most active managers don’t add enough value to cover their costs, even in market environments that should be more favorable for stock-picking. It’s also worth pointing out that it’s impossible to predict when the market climate might turn out to be more conducive to active management. The potential opportunities offered by a stock-picker’s market may or may not materialize. And the odds that paying up for active management will lead to better returns are low—no matter what the market environment.