Closer Look: Active Management's Comeback in an Era of Dispersion

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Over the last decade, the rise of passive investing reshaped the investment landscape, fueled by low-cost index funds and historically narrow market leadership. However, the environment is beginning to shift. A new era of market dispersion, which is characterized by a broader range of stock returns and heightened economic uncertainty, is helping active management stage a notable comeback.

Market dispersion measures the difference between the best- and worst-performing stocks in the market. Higher dispersion creates more opportunity for skilled active managers to add value through security selection. According to S&P Dow Jones Indices, dispersion among S&P 500 stocks hit its highest level in over three years in early 2024, a sharp departure from the unusually correlated markets of the prior decade.

This environment reflects both macroeconomic and sector-specific dynamics. The Federal Reserve’s interest rate hikes, persistent inflation, uneven corporate earnings, and geopolitical instability have produced winners and losers across industries and asset classes. In contrast to the low-volatility, synchronized growth period following the Global Financial Crisis, today's conditions favor active managers who can differentiate between strong and weak businesses.

And the data supports the resurgence of active strategies. In 2023, 51% of U.S. large-cap active equity funds outperformed their passive benchmarks after fees, which was the highest success rate since 2009 (Source: Morningstar). Particularly within smaller-cap stocks and international markets, active managers have capitalized on inefficiencies overlooked by broad indexes. As an example, nearly 60% of international equity managers beat their benchmarks in 2023 (Source: Morningstar).

Beyond stock selection, thematic trends are also creating fertile ground for active strategies. The boom in artificial intelligence, energy transition, supply chain reconfiguration, and regional economic divergence requires thoughtful portfolio construction. Some passive strategies, by design, overweight yesterday’s winners, while active managers can pivot toward emerging opportunities. The rise of "weightless winners"—companies thriving in areas like AI and services despite broader economic slowing—demonstrates the need for discerning, active allocations.

Moreover, sector concentration within popular indices has created potential risks for passive investors. As of early 2024, the top 10 stocks accounted for nearly 32% of the S&P 500's total market capitalization, as can be seen in the chart on the right (Source: Goldman Sachs Research). This concentration means that many passive investors are heavily exposed to a narrow slice of the market, regardless of valuation or fundamentals. Active managers, in contrast, have the flexibility to underweight crowded trades and overweight undervalued areas, potentially enhancing risk-adjusted returns.

Of course, active management is not universally successful. Investors must be selective. Consistency, a repeatable investment process, a strong team, and cost-conscious implementation remain key to identifying managers with a higher likelihood of outperformance. As such, these factors, among others, are considered as part of the Ategenos Capital investment manager search and due diligence process.

Ultimately, the case for blending active and passive strategies has strengthened. Passive investments can offer efficient, low-cost exposure to broad markets, while active management can add value in pockets where dispersion, inefficiency, or concentration risks are high. A thoughtful combination can help investors better navigate a complex and evolving investment environment.

At Ategenos Capital, we believe in the power of both active and passive management. We employ passive strategies to achieve efficient, low-cost exposure where markets are highly efficient. Conversely, we allocate to active managers in areas where we believe skilled security selection can exploit market inefficiencies and where the opportunity to outperform is greater. This dual approach seeks to optimize portfolio allocations, enhance long-term returns, and better manage risks on behalf of our investors.

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