Only 27% of large-cap active funds beat passive last year. Price the practice accordingly

In the 12 months to June 30, only 27% of active managers of large-cap stocks beat passive funds built to track indexes such as the S&P 500, and across the decade ending the same day active funds came out ahead just 13% of the time on average, according to American Banker's reading of Morningstar's latest data ^[1][2]. That is not a bad year to be explained away in a client review; it is 87% of the decade spent failing at the thing many fee schedules are still implicitly priced on ^[20].

Start with the flow of money, because it has already voted. Passively managed ETFs and mutual funds held $21.88 trillion in the United States at the end of June ^[4]. The bargain in active management was always higher fees in exchange for higher returns, and investors and advisors have been pulling money out of active funds for decades ^[16]. Randy Bruns of the RIA Model Wealth told the publication he is "shocked" by how many advisors still use active portfolio management, and that "we have decades of evidence showing how difficult it is to consistently beat an index after fees" ^[6][5]. His explanation for the persistence is distribution rather than performance: large banks and brokerages build their own products and employ "armies of financial advisors incentivized to sell them" ^[7].

The defence of active management is narrower than its market share, and it is worth stating precisely. In small- and mid-cap stocks, where coverage is thinner, active managers' hit rate against passive counterparts rises to nearly 50%, per Morningstar ^[8]. Michael McMeans, president of Silverling Financial in Columbus, Ohio, argues that active work pays where public data is scarce, and large caps are the most analysed segment of the market ^[10]. Private investments, often under no obligation to report publicly, go further: "Firms are staying private much longer, and that means there is a lot more work to do in determining what to own," he said ^[11][12]. Monica Dwyer of Harvest Financial Advisors in Ohio makes a related point about benchmark risk: recent index gains have been driven by a small number of tech companies, semiconductors especially, so beating the S&P 500 has required a concentration most fiduciary advisors would not accept [c13a]^[15]. Her portfolios are lighter on technology because of concerns about an AI bubble and are still in line with the index year to date, which she calls excellent on a relative basis ^[13].

Read those defences together and the operating conclusion is uncomfortable for anyone billing a flat percentage on assets for large-cap selection. The roughly 37-point gap between the small- and mid-cap hit rate and the large-cap decade figure says the skill premium exists in specific, illiquid, poorly covered corners, not across a client's whole equity sleeve ^[21]. Everything else is a manufacturing decision better solved with a cheap index fund. Bruns puts the value elsewhere entirely: "tax planning, retirement income strategy, Social Security and Medicare decisions, and estate planning" ^[18]. Those are deliverables with dates, documents and measurable dollar outcomes, which makes them billable on their own terms rather than smuggled into a 1% wrap.

What to watch: whether firms actually unbundle. At least one academic paper disputes the standard reading of post-fee active underperformance, and scores of firms still sell managed portfolios built in house or bought from outside providers ^[17][22]. The tell will be fee documents that name planning work explicitly and price selection only where the data thins out ^[8][12].