When diversified investments are defeated by the craze of technology stock concentration, actively managed funds face a wave of trillions of redemptions.

For diversified fund managers, the most unwelcome dilemma is to have their investment portfolios highly dominated by seven tech giants - all American companies with giant market capitalizations, all focused on the same sector of the economy. However, as the S&P 500 index hits new historical highs this week, investors must face a harsh reality: if they want to keep up with the market, it largely means being forced to heavily hold these stocks. In 2025, a small group of closely related tech super giants once again contributed disproportionately to returns - a pattern that has continued for nearly a decade. What is truly noteworthy is not that the familiar winners' list remains the same, but that this income gap is intensifying with unprecedented intensity, severely testing investors' patience limits. Frustration determines the flow of funds. According to estimates from the Investment Company Institute (ICI), about $1 trillion flowed out of actively managed equity mutual funds throughout the year, marking the 11th consecutive year of net outflows and, by some measures, the most severe year of outflows in this cycle. In contrast, passively managed stock exchange-traded funds (ETFs) received over $600 billion in inflows. As the year progresses, investors are gradually exiting - reexamining whether it is worth paying extra costs for portfolios significantly deviating from the index. However, after a retrospective examination, they find that this differentiated approach not only did not bring the expected returns but also forced them to face the embarrassing situation of "paying a premium but not receiving profits", eventually passively enduring the consequences of a failed strategy. Dave Mazza, CEO of Roundhill Investments, said, "This concentration makes it harder for active fund managers to perform well. If you do not weigh the 'seven giants' according to benchmark weightings, you are likely to face the risk of underperformance." In contrast to commentators who thought they could shine by picking stocks, the cost of deviating from the benchmark was still high this year. Narrow Rise According to data compiled by a New York bank investment company, in the first half of this year, in many trading days, less than one-fifth of stocks rose in sync with the broader market. Narrowly rising is not uncommon, but its persistence is key. When the rise is repeatedly driven by a very small number of stocks, diversifying investments no longer helps with relative performance but starts to weigh down on performance. The same phenomenon is also evident at an index level. Looking at the whole year, the performance of the S&P 500 index exceeded its equal-weight version, which gave equal weight to a small retailer and Apple Inc. For investors evaluating active strategies, this becomes a simple arithmetic problem: either choose a strategy with a low weighting of large-cap stocks and bear the risk of lagging behind, or choose a strategy with weightings close to the index and find it difficult to justify paying for a method that is almost indistinguishable from passive funds. According to public data, 73% of US equity mutual funds underperformed their benchmark index in 2025, reaching the fourth-highest level since 2007. Especially during the market rebound stage triggered by tariff fears in April, this underperformance phenomenon intensified - the continued frenzy of the artificial intelligence industry strengthened the leading position of tech stocks. Of course, there are exceptions, but these exceptions require investors to accept significantly different risks. One of the most striking examples comes from Dimensional Fund Advisors LP, whose $14 billion global small-cap value investment portfolio this year slightly exceeded 50% in returns, not only outperforming the benchmark but also surpassing the S&P 500 index and the Nasdaq 100 index. The structure of this portfolio is quite instructive. It holds about 1,800 stocks, almost all of which are located outside the US, with a heavy weighting in the financial, industrial, and materials sectors. Instead of trying to avoid US large-cap stock indices, it is more like being directly outside of them. Joel Schneider, Deputy Head of North America Equity Portfolio Management at the company, said, "This year has given us a great lesson. Everyone knows that global diversified investments are beneficial, but it is really difficult to stick to it. Following yesterday's winners is not the right strategy." Holding on to Winners Margie Patel, the fund manager of Allspring Diversified Capital Builder Fund, is an example of holding on to her beliefs. The fund has returned about 20% this year, benefiting from bets on chip manufacturers Micron Technology, Inc. and AMD. Patel said, "Many people like implicit or quasi-indexed investments. Even if they are not sure they can outperform, they hope to have allocations across various sectors." In contrast, her viewpoint is, "Winners will continue to win." The trend of large-cap stocks growing bigger and bigger has made 2025 a fruitful year for potential bubble hunters. The price-earnings ratio of the Nasdaq 100 index is over 30 times, and the price-to-sales ratio is around 6 times, both at or near historical highs. Dan Ives, a analyst at Wade Bush Securities, launched an ETF focused on artificial intelligence in 2025 (code IVES), which has rapidly grown to nearly $1 billion. He said that such valuations might make people nervous, but it is not a reason to give up on this theme. "There will be moments that make you sweat, but it is these moments that create opportunities," he said in an interview. "We believe this tech bull market will continue for another two years. For us, the key is to find indirect beneficiaries, which is also our way of continuing to address the Fourth Industrial Revolution from an investment perspective." Theme Investing Some other successful cases have benefited from another form of concentrated investment. The VanEck Global Resources Fund has returned nearly 40% this year, benefiting from demand related to alternative energy, agriculture, and base metals. The fund, established in 2006, holds companies such as Shell, Exxon Mobil Corporation, and Barrick Mining, and the management team includes geologists, engineers, and financial analysts. "As an active fund manager, this allows you to pursue major themes," said Shawn Reynolds, a geologist managing the fund for 15 years. However, this approach also requires firm conviction and tolerance for volatility - after experiencing several years of unstable performance, the interest of many investors in these qualities has waned significantly. By the end of 2025, the core lesson that investors learned is not "active management fails" or "index investing solves all market problems." This lesson is simpler but also more unsettling - after another year of concentrated tech stock surge, the cost of deviating from mainstream strategies remains heavy. For many investors, the willingness to pay a premium for a "counter-mainstream layout" has significantly diminished compared to previous years. However, Osman Ali, from Goldman Sachs Group, Inc.'s asset management company, believes that there is still "alpha" to be found beyond large tech stocks. This global quantitative investment strategy co-head relies on the company's proprietary model, which ranks and analyzes about 15,000 stocks globally daily. Constructed around a team investment philosophy, this system has helped its international large-cap, international small-cap, and tax-efficient funds achieve a total return of about 40%. He said, "The market will always give you something; you just need to observe it in a very calm, data-driven way."