Active managers favor stock-picking as mega-cap decouples

Active equity managers are moving from broad index exposure to selective stock-picking as previously synchronized mega-cap technology stocks stop moving together. Portfolio teams report reallocations into healthcare biopharma and industrials and greater emphasis on individual company analysis.

The S&P 500 Growth Factor has risen more than 2,000% since 1992. Much of the index’s recent gains concentrated after 2015, when a tight group of large technology companies accounted for a large share of market returns and increased single-stock exposure in passive growth vehicles.

In the past months, performance and fundamental trends have diverged within that group. Some companies continue to expand revenue and margins; others are showing slower growth, multiple compression or margin pressure. That dispersion raises the risk that index-tracking funds will carry heavy weightings in a few names regardless of company-level prospects.

Maria Karahalis, equity investment director and portfolio strategy manager at Capital Group, noted increased differentiation among those firms and said accurate selection has become more important. She added that active teams can avoid extended, high-multiple names while holding companies with stronger fundamentals. “If we think about that opportunity, we believe we’re three years into a 20-year growth cycle,” she said of secular trends in other sectors.

Investors are identifying secular growth outside traditional technology sectors. Healthcare, particularly biopharma, is drawing interest because of new treatments for chronic conditions. Companies such as Eli Lilly have attracted attention from investors focused on obesity and weight-loss therapies.

Industrials are also a focus. Global air travel has been recovering, increasing demand for specialized aerospace components, replacement parts and long-term maintenance contracts. Separately, the build-out of power and facility infrastructure for large artificial intelligence data centers is creating work for component suppliers and service providers.

Some active strategies spread growth exposure across multiple sectors and add cyclical or turnaround situations when company fundamentals appear underpriced. Capital Group launched an active growth ETF in February 2022 that applies a multi-manager structure: separate portfolio managers run sleeves of the fund and combine high-conviction picks, supported by firm-wide research and corporate meetings.

Passive funds remain a low-cost way to gain broad market exposure, but they can inherit concentration risk when a few stocks dominate an index. Market data show growth leadership has rotated across decades, and current cross-stock dispersion is changing how some investors and managers approach portfolio construction.