The S&P 500 – the top 500 companies in America – is up around 12% this year to date, which gives the impression that the US stock market is flying along (albeit one should remember the S&P 500 fell 8% in 2022) . The FTSE 100 – the top 100 companies listed in the UK – is up 5.5% this year by comparison.

However, if you dig a little into the S&P 500 data, it quickly becomes apparent that just seven firms are responsible for the majority of the growth. You’ll recognise the brands I’m sure – Apple, Microsoft, Tesla, Nvidia (computer chips), Alphabet (Google), Amazon, Meta (Facebook).

If you exclude those companies, the S&P ‘493’ has grown by just 2.5%.

This concentration of firms performing well is very unusual and creates problems for active fund managers because, unless you happen to own those seven stocks, growth is hard to find.  An active fund manager would probably wish to avoid simply investing in seven of the most famous brands on the planet, as it isn’t likely to lead to outperformance.

However, when those seven brands are the only ones performing really well, not owning them leads to underperformance. 

This in turn means that so far this year the passive funds we recommend with Vanguard have performed very well – they by default own all the above firms – and our active funds predominantly with Sarasin but also FEI and EQ have fared less well. To clarify, I’m not saying the active funds have performed badly because in the context of a very difficult economic outlook they haven’t. But in comparison to Vanguard, they are definitely someway behind.

Suffice to say the active managers are aware of this (and understand the details far better than I do!) and are working hard to ensure their performance is as good as it can be.

A much-used phrase of the last few years remains true – we live in very interesting times.