The Scoreboard Speaks
Preliminary eVestment data show 58% of large-cap core mutual funds outperformed the S&P 500 in the first three months of 2025, the highest hit-rate since the 62% recorded in the first quarter of 2009. Net-of-fee alpha averaged 82bp, turning what had been a decade-long headwind for active fees into a tailwind that pulled roughly $18bn into actively-run U.S. equity mandates, EPFR reports. The swing is not academic for the 28- to 45-year cohort that does its rebalancing after hours: the cheapest S&P 500 ETF still costs 0.03% but delivered 0% excess return; the median winning active fund charged 0.65% and still left investors 17bp ahead after costs. Dispersion, not cheap beta, paid.
Macro Regime, Not Stock-Picking Genius
Three macro releases framed the quarter. January’s CPI printed 2.8% y/y, 30bp below the Fed staff projection embedded in the December SEP. February non-farm payrolls surprised by 110k to the downside, and the March ISM Services index slipped to 48.2. Futures went from pricing two cuts in December to five cuts by September, flattening the 2s-10s spread to –42bp, the most inverted since the Silicon Valley Bank episode. Rate-sensitive sectors cracked first: regional banks underperformed by 530bp in January. Managers that entered 2025 underweight Financials and overweight Health Care—sectors with low duration exposure—captured a 120bp head start before single-name research even mattered. Bloomberg tracking baskets show the factor contribution from “duration beta” explained 38% of the excess return gap between first- and third-quartile core funds.
Where the Bread Crumbs Led
With the index dominated by a 32% combined weight in Apple, Microsoft, Nvidia, Alphabet and Meta, the surprise was narrow leadership did not work. The top-five megacaps returned 9.4% in Q1; the equal-weight S&P did 11.1%. Active funds held 420bp less mega-cap exposure versus the benchmark on 31 December, according to Reuters composite holdings. That underweight, maligned for five straight years, became the single largest source of positive tracking error. Meanwhile, Energy—only 3.6% of the index—rallied 18% as WTI breached $86 on OPEC+ rollover and Red Sea disruptions. Funds were 180bp overweight, adding another 30bp of alpha. CNBC data show the sector posted its best risk-adjusted quarter since 2022.
Flows Follow Performance, Finally
EPFR clocked $18.3bn of net inflows to U.S. large-cap active funds in Q1, the first quarterly inflow since 2021. The pattern is lumpy: 76% came in the final four March settlement days, after three-month numbers hit client decks. The Federal Reserve’s Financial Accounts show households now hold 39.8% of directly-owned equities through mutual funds, still below the 2003 peak of 52% but up 280bp year-on-year. The incremental buyer is not the retail day-trader; it is the 401(k) omnibus channel where plan sponsors re-enrolled participants into active target-date sleeves after 2024’s volatility shock. Fee compression is therefore moderating: average expense ratios ticked up 0.4bp, the first rise since 2015, because gross inflows skewed toward mid-fee institutional share classes rather than zero-fee retail ETFs.
Valuation Dispersion Is the New VIX
NY Fed Staff calculate that the cross-sectional standard deviation of next-twelve-month P/Es within the S&P 500 reached 6.8× in March, a level exceeded only during the 2018 Q4 drawdown and the 2020 pandemic trough. High dispersion widens the strike zone for stock pickers. Yet the median forward multiple on the index itself is 20.1×, 11% above the ten-year average, so managers must solve for both alpha and downside beta. One solution has been to pair long overweight Health Care (17.3×) with short underweight Consumer Discretionary (24.9×), capturing 7.6× of valuation spread while maintaining sector neutrality in risk models. <插图：2020–2025 S&P 500 Forward P/E Dispersion vs Active Fund Hit Rate>
Options Market Refuses to Celebrate
Despite the alpha renaissance, three-month 25-delta skew on the S&P 500 ended March at –7.2%, its most negative since 2022. Asset managers increased gross equity options positions by 18% quarter-over-quarter, CFTC commitment-of-traders data show, but 64% of the increase came in protective puts. The divergence—rising fund returns versus rising hedging spend—signals professionals regard the Q1 win as borrowed time. Implied vol at 16.4% still trades below realized vol at 17.9%, a rare inverted surface that historically resolves through spot selling rather than vol compression.
What Has to Stay True for Outperformance to Persist
Active wins when any two of the following three conditions hold: (1) dispersion >6× P/E sigma, (2) index concentration <25% in top-five names, (3) rate volatility >100bp on two-year swaps. NY Fed data put current rate vol at 118bp, meeting the third criterion, but concentration is still 32% and dispersion, though elevated, tends to mean-revert inside two quarters. The base case therefore argues for a narrower opportunity set in Q2 unless macro data continue to surprise. A plausible catalyst is the April 30 employment cost index; a sub-0.8% q/q print would reopen the dovish corridor, steepen the curve and likely restart sector rotation into laggards—precisely the environment where fundamental screens outperform cap-weighted drift.
Energy and Industrials Still Offer Beta With Idiosyncrasy
Even after a 21% Q1 rally, S&P Energy trades at 5.4× EV/DACF versus a 15-year median of 7.2×. Free cash flow yields at 11% compare to 4.3% for the index, and buybacks are running at 3.6% of shares, double the sector’s 2015–2019 average. Industrial analysts note similar optionality: MSCI data show the sector’s 2025 EPS sensitivity to a 100bp decline in ten-year yields is –4%, the lowest of all cyclicals, while upside to a 1pp rise in ISM is +12%. Funds increased Industrials exposure by 90bp in March, yet active weight remains –220bp versus benchmark, leaving room for continuation without crowding. <插图：2024–2025 Active Fund Positioning vs Benchmark in Energy and Industrials>
The Dollar’s Quiet Comeback Matters for Tech
The DXY index added 2.8% in March, its best month since 2022, as European gas prices collapsed and the ECB opened the door to a June cut. A 1% rise in the trade-weighted dollar typically shaves 0.4% from S&P 500 EPS because 29% of revenue is booked abroad, IMF working papers estimate. Mega-cap Tech derives 56% of sales overseas, double the index average, so greenback strength lands directly on the same names that underperformed in Q1. Active managers’ underweight there is therefore morphing from a momentum play into a currency hedge, reducing the need for explicit FX overlays that cost 15–20bp annually.
Bottom-Up Signals Are Blinking Yellow
Insider selling surged to $9.4bn in March, the highest since 2021, according to SIFMA-form 4 filings. Technology accounted for 42% of the total, led by discretionary sales at two semiconductor equipment makers. Simultaneously, secondary share issuance announced by S&P 500 constituents totaled $28bn in Q1, up 60% q/q. The supply wave has not yet dented performance because retail inflows absorbed the float, but history shows secondary acceleration leads primary by one quarter; IPO pipelines are already 30% above 2024 levels. For active managers, the takeaway is stock-specific risk is rising; position sizing algorithms at several large-cap long-only shops have cut single-name limits to 180bp from 220bp since January.
Implications for the Time-Strapped Investor
Beating the index in 2025 no longer requires pre-market option sweeps or late-night futures checks; it requires deciding whether the macro conditions that rewarded fundamental dispersion remain intact. The evidence tilts mildly positive: dispersion is still wide, rate vol is elevated and concentration risk keeps the benchmark vulnerable to a single-sector shock. Yet the window historically closes fast—median persistence of >55% hit-rates is two quarters since 1990. Allocators who moved 20–30% of their equity sleeve into active mandates during February now sit on 120bp of excess return and face the classic decision: rebalance back to passive and lock in the alpha, or let the bet ride until concentration falls below 25%. The middle ground is to reset exposure back to benchmark weight in mega-caps while keeping satellite overweights in Energy and select Industrials, sectors where valuation cushions still exceed macro duration.
For a concise breakdown of positioning data, earnings sensitivity grids and currency-adjusted factor scores we update each Friday after the close, see the free institutional flow note (no subscription, 3-minute read).