Tech, US equity concentration pose challenges for active managers

New research from Frontier Advisors has determined that global active equity managers suffered their “most challenging year” in over 20 years in 2024, having to contend with significant market concentration centred a round top tech stocks and US equities.

According to the research paper, the median global active equity manager underperformed the MSCI All Country World Index (MSCI ACWI) by 4.6 per cent in the 12 months to December 2024, making it the worst relative return seen in more than two decades.

Driven by ongoing innovation in artificial intelligence (AI) and future technology, the strong run of the ‘Magnificent Seven’ (M7) technology stocks posed significant challenges for active managers in global equities. The research indicated that managers with no position in M7 member, Nvidia, saw a 3.1 per cent drop in performance.

“This year’s benchmark performance was driven by a small group of stocks, which posed a challenge for active managers,” Brad Purkis, Senior Consultant at Frontier Advisors, said.

“The two thirds of global active managers who did not hold Nvidia faced significant difficulty in outperforming the broader market, and that’s just one of that group of seven dominant companies.”

The research also found that quantitative managers managed to overcome the obstacles, with the benefits of their diversified portfolios and ‘effective risk controls’. Value managers were not as lucky, with high growth managers in particular the select few able to outperform benchmarks.

Similarly, emerging markets managers also faced tough conditions, underperforming the MSCI Emerging Markets Index by 0.7% for the year.

“The results show how narrow market leadership and macroeconomic forces can deeply affect active management outcomes,” Purkis said.

“Managers with diversified, systematic strategies fared better during this challenging period. Emerging markets provided little relief for active managers.

“Taiwan Semiconductor Manufacturing Company (TSMC)’s dominance meant that underweight positions were difficult to overcome for many managers.”