Over the past decade, $750 billion has flowed out of actively managed funds while lower-cost, passive funds raked in $1.3 trillion, according to Morningstar data.

Sure, savvy investors are paying closer attention to fund fees, but fund managers have also underperformed passive funds for about a decade, as well. But last year, the coronavirus pandemic, a true black swan event, roiled markets. The swift decline in asset prices, followed by a robust recovery, provided many opportunities for active fund managers, particularly in less crowded parts of the market.

At Northwestern Mutual, our investments team made several changes to the portfolios we manage throughout that turbulent year, and that positioning set us up well in the current economic environment. TIPS and an overweight to equities in early April, followed by a shift in September to value and cyclical exposure all provided tailwinds. However, in addition, several active managers — including managers who had previously struggled — outperformed and provided a lift within our portfolios.


Every year, both the S&P’s SPIVA report and Morningstar’s Active/Passive Barometer provide snapshots on how well actively managed funds performed relative to the S&P 500 or other passive counterparts. With 2020 performance data now finalized, we can see how well active managers held up.

In asset classes, such as U.S. Large Cap where outperformance has been difficult to come by, around 60 percent* of funds underperformed. In other, arguably less efficient asset classes, such as Real Estate and Emerging Markets, active funds enjoyed much more success. According to Morningstar, nearly 70 percent of Emerging Markets managers and 71 percent of Real Estate managers outperformed their passive counterparts in 2020.

While active fund results were mixed, we remain optimistic about active management in the near term for several reasons. The U.S. stock market is near all-time highs, but the companies leading it higher are changing. Returns had been concentrated in a handful of large technology companies, but increased optimism about the reopening has spurred growth in other parts of the market. Cyclical stocks, such as energy, financials, and mid- and small-cap stocks have outperformed those “old guard” tech stocks recently. Growth is broadening beyond the top five largest in the S&P. These facts keep us cautiously optimistic that active managers have ample opportunity to outperform.


In late summer 2020, the top five companies in the S&P 500 comprised 25 percent of the index’s entire valuation. That was up from 13 percent as recently as 2016. The dominance of Apple, Microsoft, Amazon, Facebook and Alphabet (Google) cannot be understated; they’ve all experienced outsized returns over the past several years. In 2020, those five firms accounted for 51 percent of the return in the S&P 500.

A bar chart showing the distribution of returns in the SP 500

Many active managers we spoke with have been reluctant to overweight names that already represent outsize positions within an index. While a diversified equity manager may limit their largest holding to 2 to 4 percent of the overall portfolio, Apple alone represents roughly 6 percent of the index. This weighting differential is where some underperformance against passive funds creeps in.

If Apple rises more than the index, managers who underweight Apple take a hit on performance. If only the top five stocks are going up, a manager would need to be overweight those stocks to outperform the index – which is already top-heavy in those “big five” companies. This puts managers in a bit of a catch-22 as they attempt to balance growth and risk. A portfolio concentrated in a few names is risky, which is why many funds diversify outside those top names. When those few names drive performance, managers underperform. However, when performance broadens, a more diversified portfolio can outperform those “big five”.


By late summer 2020, pharmaceutical companies were announcing promising COVID-19 vaccine results. It was at that time, when markets sniffed out an end to the pandemic, that market leadership started changing.

Sector by sector contribution to gains

We saw a rally in more economically cyclical areas. Value stocks, which do well during times of economic growth, began showing signs of life. At the same time, those tech behemoths that lead the market out of March's bottom underperformed, trailing even energy and financial stocks. Companies outside the “big five” were clearly participating in market growth, and that has continued into 2021.

Underperformance of the S&P 500 Equal Weighted Index relative to the market cap-weighted S&P 500 shows how the top names outperformed in 2020. This has reversed in 2021 as small- and mid- cap stocks outperformed.


One area we study in portfolio construction is how individual stocks move relative to one another — their correlation with one another. In periods of stress, stocks are highly correlated as they all go down at the same time.

In the chart below, you can see the spike in correlations in March of 2020. When all stocks move together it can be tough for active managers to outperform because everyone is in the same boat. When correlations are falling, as they are today, active managers have more opportunity to select stocks based on unique attributes or factors that could lead to outperformance. That’s why we continue to hold actively managed funds in our portfolios and remain optimistic about their potential for performance in the current market climate.

Chart showing correlations between SP 500 components


Within the Wealth Management Company, we put a lot of thought and analysis into selecting active managers for our clients’ portfolios. We screen the universe of funds to find managers who exhibit characteristics we believe contribute to long-term success, a process that goes well beyond evaluating performance. A simple screen for low-cost active managers may tilt the odds in an investor’s favor, but we take it a step further with a dedicated team that performs in-depth research on each fund manager.

We conduct interviews with portfolio management teams to get a better sense of their process. We balance multiple performance risk factors to ensure they align with our philosophy. We also ensure the firms we work with have solid, durable business models that will provide the tools necessary to ensure manager success. Lastly, we place a large emphasis on expenses. Active managers typically charge more than a passive index ETF, which means our clients should be getting more. That’s why we peel back the onion to deeply evaluate what we are purchasing. We then construct portfolios based on the unique attributes that each manager brings to the table.

As always, we encourage you to contact an advisor who can help build a broader plan to ensure your portfolio aligns with your goals and risk tolerance. It's simply the best way to ensure you stay on track for financial success.

*SPIVA – All Large Cap funds 57.1 percent underperformed the S&P 500. Morningstar A/P Barometer 2020 success rates for U.S. Large Blend 31.1 percent; U.S. Large Value 52.1 percent; U.S. Large Growth 34.4 percent.

**No investment strategy can guarantee a profit or protect against a loss. All investments carry some level of risk including the potential loss of all money invested. Past performance is no guarantee of future performance.

The opinions expressed are those of Northwestern Mutual as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any investment or security. Information and opinions are derived from proprietary and non-proprietary sources.

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