The results from our SPIVA U.S. Year-End 2024 Scorecard demonstrate another challenging year for active managers, with 65% of U.S. large-cap funds underperforming the S&P 500^®, slightly above the report’s 24-year historical average of 64%. But small-cap managers fared significantly better, with only 30% of small-cap funds underperforming the S&P SmallCap 600^®, the lowest underperformance rate on record. What might explain the widely contrasting fortunes between large-cap and small-cap managers?

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2024 was characterized by positive skew in the S&P 500’s constituent returns, as shown in the top half of Exhibit 2, with the average return outpacing the median return by 1.6%, evidencing a longstanding challenge for more concentrated active managers, who may be less likely to own these top performers in their strategies. Because the largest stocks in the index were among the best performers, the index’s return of 25.0% was well above the simple average, an additional headwind for managers who were underweight in the largest stocks. These results are not surprising, as the average return has been greater than the median for The 500’s constituents in 20 out of the past 24 years.

Combining these elements of skewness and large-cap outperformance, a simple way to analyze the conditions for stock selection is to measure the percentage of constituents that beat the benchmark. Only 28% of member stocks beat the S&P 500 in 2024, which is the second-lowest percentage in 24 years and close to the 26% in 2023, which was another challenging year characterized by large-cap dominance.

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Turning our attention to small-cap managers, the bottom half of Exhibit 2 shows that 44% of S&P SmallCap 600 constituents beat the benchmark in 2024, close to the long-term average of 45%. The S&P 600^®’s return distribution was positively skewed as well, with an average return exceeding the median by 2.8%, consistent with the positive skew in 22 of the past 24 years. Just as we observed with large caps, the S&P 600 return of 9% was above the average, indicating that larger stocks within the small-cap benchmark outperformed.

Both large- and small-cap managers shared relatively slim prospects for stock picking, characterized by a positively skewed distribution of benchmark returns and the outperformance of larger stocks. But small-cap managers may have benefited from ample opportunities to tilt up toward outperforming large caps, with a 16% return differential separating the S&P 500 and the S&P 600, the widest differential in the SPIVA Scorecard’s history. Exhibit 3 illustrates that small-cap fund underperformance rates historically tended to improve with large-cap outperformance.

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While conditions for stock picking were generally tough in 2024, small-cap managers had a banner year. The SPIVA U.S. Year-End 2024 results provide evidence that style bias may play a major role in explaining active manager outperformance across the capitalization spectrum and is importantly an indication that true stock selection skill may be more rare.

The author would like to thank Nick Didio for his contributions to this blog.

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