Last year, nearly two-thirds of the top 100 active US stock funds by assets lagged their index, as shown below.
But, improbably enough, the stocks these 100 funds collectively owned beat the benchmark in 2025.
How could that be? I assumed the funds’ stock holdings were left untouched from Dec. 31, 2024, to the end of last year. No buying, no selling. Let ‘em ride. By contrast, the actual funds traded, with the effects of those buys and sells baked into their results.
That wasn’t the only key difference: The do-nothing hypothetical wasn’t saddled with fees like the actual funds were (0.59% asset-weighted expense ratio). So, you have to haircut the hypo’s return by some amount to compare apples-to-apples with the actual active funds’ results.
But even after taking that into account, there’s still a gap. And so, the question is why? To address that, I ran a performance attribution analysis in which I compared the hypo portfolio’s 2025 holdings and returns with the actual funds’.
Small Tilts Came Up Big
What stood out was that the do-nothing strategy edged ahead by letting its winners run and, conversely, treading lighter in laggards than the actual fund managers did. You can get a sense of that from the following scatterplot showing the hypo strategy’s leading contributors (top-right and bottom-left corners) and detractors (top-left and bottom-right).
For instance, the hypo got a boost from holding a bit more Alphabet GOOG than the actual fund managers, as the search behemoth surged last year amid optimism about its artificial intelligence efforts. It also sidestepped deeper losses by underweighting flagging names like bitcoin treasury firm Strategy MSTR, which got crushed in 2025 as doubts arose about the risk of its heavy debt load.
To be sure, these weighting differences were often minute, and it goes without saying the do-nothing approach got plenty wrong—the tilts added to returns less than half the time. In a few prominent instances, such as SanDisk SNDK and AppLovin APP, the actual managers profitably added to their stakes as those names raced higher.
But, net-net, the do-nothing strategy was able to edge the actual funds because, when it got it right, the enhanced returns more than offset the mistakes, with its overweightings (that is, letting winners run) doing most of the heavy lifting.
Bull-Market Baby?
Of course, it’s possible the do-nothing benefited to an unusual degree from last year’s strong equity market, which might have rewarded a strategy of letting winners ride. Given that, the question becomes how such a strategy might fare in more turbulent conditions.
To address that, I extended the measurement period to a full decade (Jan. 1, 2016, to Dec. 31, 2025), a span that includes some down years (2018 and 2022). For each year, I repeated the same exercise—freezing the 100 largest active US stock funds’ aggregate holdings as of Dec. 31 of the preceding year and seeing how they did over the ensuing year. Here’s what it looked like.
The do-nothing portfolio would have beaten the actual funds in nine of the 10 years, including 2018 and 2022, years that equities fell, suggesting the strategy’s success wasn’t solely a function of a rising market. All told, its 14.3% annual return over this period bested the actual funds’ by nearly a percentage point per year. (Note again that the do-nothing returns do not reflect any fees.)
A More-Extreme Do-Nothing
Out of curiosity, I also calculated the performance of a hypothetical do-nothing portfolio that froze the collective holdings of the 100 largest US active funds as of Dec. 31, 2015, and left them untouched over the subsequent 10 years. This is a more extreme version of the strategy, as it would entail sitting idly by for a full decade, whereas the version I tested earlier only involved sitting around for a year before resetting and starting anew.
How would it have done? Splendidly, gaining around 15.2% per year over the 10 years ended Dec. 31, 2025. That would have comfortably topped the asset-weighted average return of the actual funds (13.8% annually) and surpassed the index’s 14.9% annual return as well.
Takeaways and Lessons
Active funds chose the “right” stocks
The hypothetical do-nothing strategy wouldn’t have fared as well if these active fund managers hadn’t chosen winning stocks for their portfolios. After all, it was a strategy of not deviating from whatever the managers chose in the first place. Had they picked a bunch of dregs, that would have shown up in the do-nothing’s results.
Active fund managers take a lot of flak for lagging the index—and not without reason—but it doesn’t look like a stock-picking problem, per se.
- Lesson: In aggregate, the managers of the largest funds in the world appear to be skilled at picking stocks. And yet, for most, it’s still not enough to beat the index after fees. That doesn’t make the enterprise hopeless, but it argues for being clear-eyed when it comes to analyzing active funds or attempting to pick stocks on our own.
Active funds faltered at trading
For as good as these managers might have been in choosing stocks, it appears they struggled to discern when to buy, when to sell, and when to leave well enough alone. Otherwise, a do-nothing approach wouldn’t have had the success it had compared with the actual active funds.
- Lesson: Evaluating managers shouldn’t end at assessing the process for identifying worthy stocks. It should extend to how and when they initially buy, how they manage the position, and when and how they finally exit. This argues for a next generation of analytics that assesses the full lifecycle of position ownership and how skillfully managers trade, good recent examples being my colleague Jack Shannon’s studies of stock-picking success and manager success rates.
The index is a quasi do-nothing strategy
No, indexes aren’t static. They adjust every day to reflect market movements and corporate actions, and moreover, index committees can decide every so often which stocks to admit and which to purge from a benchmark. It’s a dynamic process.
But because the index impounds the decisions of a diverse set of portfolio managers, there’s a settling-up of the ledger that happens, where one manager’s buy is offset by another’s sell, writ large, the market over. And this can mitigate issues associated with the kind of untimely transacting that it appears has bedeviled many active funds.
- Lesson: Indexing isn’t a silver bullet, but it emulates do-nothing investing by minimizing trading. This is almost certainly one of the reasons—apart from an enduring fee advantage—it’s been so hard for even the largest managers to beat.
Active managers could make this more of a contest
If it appears active funds are doing too much buying and selling, or at least aren’t trading efficaciously enough, then the question becomes: Can they quiet down?
It’s harder than it sounds. Many of the largest managers sell themselves on the depth and breadth of their resources: a deep analyst team, a sophisticated trading function, a fleet of experienced managers. This creates an institutional imperative to tap into that talent and know-how and, with it, the potential for more transacting.
But it seems like it would behoove them to reexamine their priorities to reduce trading. Again, the obstacle to beating the index didn’t appear to be the collective stock picks themselves but rather what came after. They could take a page out of indexing’s book and trade less often, potentially closing the gap.
- Lesson: Incentives drive actions. The managers of the largest active stock funds are highly driven and accomplished professionals. They have ample motivation to try to beat their index. But organizational imperatives—such as leveraging analysts for the next new idea, hewing to compliance and policy mandates, or mitigating career risk—can induce decisions that lead to trading and ultimately drag on returns.
Switched On
Here are other things I’m writing, reading, watching, or listening to:
- A roundup of recent articles on the ERShares private/public crossover ETF’s saga
- PitchBook’s Hilary Wiek demystifies private markets on The Long View podcast
- The outlook for Fidelity Contrafund with Will Danoff set to exit
- Reappraising economic moats in an age of AI
- Telling Judy Blume’s life story
- A reconstruction of the tragic Sierra Nevada avalanche
- Two-step: Ella Langley “Choosin’ Texas”
Don’t Be a Stranger
I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.