The S&P 500 reached new heights in 2025, primarily due to the performance of seven major American tech stocks, known as the Magnificent Seven. These companies dominated the market, leaving diversified fund managers with portfolios that barely resembled the winners. Investors grew frustrated, pulling over $1 trillion from active equity mutual funds, marking the eleventh consecutive year of outflows and the largest yet. Meanwhile, passive exchange-traded funds saw over $600 billion in inflows. The narrow participation, with fewer than one in five stocks rising on many days in the first half of the year, had significant impacts. Seventy-three percent of equity mutual funds underperformed their benchmarks, the fourth worst year since 2007. Active managers faced a challenging decision: either closely follow the index and charge fees for closet indexing or deviate and risk underperforming. A few managers bucked the trend with smart investments in international small cap value, chipmakers, or thematic plays like global resources. The lesson from 2025 is that the cost of deviating from the tech leaders remained high, thinning out patience for active strategies. However, disciplined global or data-driven approaches still uncovered real opportunities in overlooked corners.

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