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By: Andrew P. VanWazer, Investment Product Specialist

You may have heard this sales pitch before: “Now is the time for active management.”

We don’t typically go all active or all passive in any given environment; both have benefits. Passive vehicles are generally lower cost, transparent and predictable relative to the market or index, but they don’t offer a chance to generate excess returns (“alpha”). Active strategies (when managers select stocks, seeking to beat the relevant benchmark index) give you that chance, but generally are higher cost and less likely to track an index.

That makes the decision on where to use active paramount.

The last five years show active managers have had greater success in certain equity categories among the nine asset categories we explored: small cap and international markets. The majority of actively managed U.S. small cap and European equity funds – 66% and 56%, respectively – outperformed their benchmarks over the past five years, net of fees; so did the median manager in each category.

So considering to go active in small cap and some international markets in your portfolio may make sense.

The bar chart shows industry 5 year performance for 9 asset classes.

Those strong results for small cap and international managers stand out from the other seven of nine equity categories we analyzed, where median managers underperformed their respective benchmarks. In U.S. large cap core, a category with 500-plus asset managers, only 23% of managers outperformed their benchmarks. U.S. large cap growth was even worse: 18% of active managers outperformed.1 To be sure, the data changes over different five-year periods.

We believe it’s not a matter of finding the right time for active management. The key is where to use it in your portfolio. (And bear in mind, of course, that the top active managers beat the odds by substantial margins – this analysis is of all active managers, not the best.)

Three factors that boost active’s odds

While many variables can influence an active manager’s performance, we have identified three main factors that we believe explain why small cap and international active equity managers can be better at beating their market indexes. These markets generally have:

Relatively low levels of analyst coverage

When fewer research analysts cover a company, it’s likely that estimates of the key metrics used to value a stock (things such as future revenues and earnings) will be less precise and/or vary widely.

That holds true, for example, for stocks in the small cap Russell 2000 Index. Analyst earnings expectations for stocks in the index differ widely: by a standard deviation (a measure of dispersion) of 12.2%, compared to 4.4% dispersion for their large cap (S&P 500) earnings estimates.

Active managers with strong research capabilities can gain an information advantage in less-covered equities, lifting their chances of picking the right stocks.

High return dispersion

Higher dispersion means the best-performing stocks do a lot better than the worst-performing stocks. Active managers can generate higher returns if they make the right call. Put another way: If they do, you can win big and vice versa.

For example, active managers have had an edge over the last 20 years in emerging market (EM) equities. On average, looking at the MSCI Emerging Markets Index, the difference between the best-performing country’s equities and the worst-performing country’s equities in the MSCI Emerging Markets Index was 99%.2 (Contrast that with S&P 500 stocks: the difference between equities in industry sectors with the highest returns and those with the lowest returns since 2003 was 42%).

Low index concentration

A highly concentrated market is one in which a few stocks with very large market capitalizations dominate (think Apple, Microsoft, Alphabet, Amazon in the S&P 500). Concentrated markets are challenging places for active strategies because managers must dedicate a lot of capital to the top positions just to be neutral vs their benchmarks. For example, to be neutrally positioned vs the S&P 500, a U.S. large cap strategy must put 32% of the portfolio in the top 10 stocks.

In contrast, the 10 stocks in the small cap Russell 2000 Index with the largest weight make up about 3% of the index. This lower benchmark concentration means active managers have more opportunities to find winners – and can take meaningful positions in them.

Consider going active in these markets

Currently, the areas of the equity market with low analyst coverage, high dispersion of returns and low index concentration are U.S. small cap, European and emerging market equities. These equity categories also had the highest percentage of active managers outperforming in our analysis.

The chart shows analyst coverage of dispersion and index concentration of select equity market areas (March 2018-March 2023)

Extra way to earn more

We encourage clients to consider other strategies, too. One is tax-loss harvesting, which is designed to generate “tax-alpha.” It can be used in both active and passive portfolios.

Put simply, tax-loss harvesting is the timely selling of securities at a loss, to offset investment gains elsewhere in your portfolio and on your balance sheet.

Instead of trying to outperform an index, a tax-loss harvesting strategy attempts to replicate an index’s performance, while actively selling individual securities when they fall in value. This allows you to capture tax losses while maintaining your exposure to the market.

You may be able to lower your tax bill at the end of the year by using the harvested losses to offset capital gains realized elsewhere on your balance sheet. A tax-loss harvesting strategy may also allow you to rely less on a manager’s stock-picking ability in areas where that is challenging and to use a market’s natural volatility to potentially generate extra value over time.

We’re here to help

We are here to help you make informed investment decisions that keep you on track for your wealth plan. Whether it’s reviewing your existing investment portfolio or seeking new investment opportunities, we can help you decide if an active or passive strategy is right for you. Contact your J.P. Morgan advisor to learn more.



Source: J.P. Morgan Private Bank and Morningstar as of March 31, 2023. Even in the best five-year stretch, the median manager excess return was just 0.07%. Performance is net of underlying fund expense ratio.


Source: Bloomberg Finance L.P. for 20 calendar years ended December 31, 2022. Based on the MSCI Emerging Markets Index.

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Tax loss harvesting may not be appropriate for everyone.  If you do not expect to realize net capital gains this year, have net capital loss carryforwards, are concerned about deviation from your model investment portfolio, and/or are subject to low income tax rates or invest through a tax-deferred account, tax loss harvesting may not be optimal for your account. You should discuss these matters with your investment and tax advisors.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

All third-party companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.


The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.


Diversification and asset allocation does not ensure a profit or protect against loss.


Small capitalization companies typically carry more risk than well-established "blue-chip" companies since smaller companies can carry a higher degree of market volatility than most large cap and/or blue-chip companies.


Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile.


Investors should be cautious when holding a highly concentrated stock position, which is typically defined as any individual holding that constitutes more than 30% of overall investment holdings. Tax consequences, including the avoidance of capital gains through selling, do not eliminate the risks of overexposure to a particular company or business sector.

The Russell 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. It was started by the Frank Russell Company in 1984. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.

The S&P 500 Index is an unmanaged broad-based index that is used as representation of the U.S. stock market. It includes 500 widely held common stocks. Total return figures reflect the reinvestment of dividends. “S&P500” is a trademark of Standard and Poor’s Corporation.

The MSCI Emerging Markets Index is an index that captures large and mid cap representation across 24 Emerging Markets (EM) countries.

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