For active managers, the math is stark. Out of thousands of mutual funds, literally only one beat the Nasdaq 100 over the last five, 10 and 15 years. It did so by boiling down stock picks to about two dozen companies and riding almost all of them to gains.
Ron Baron, the 80-year-old Wall Street veteran who still oversees the fund, says his secret is combining an unwavering faith in entrepreneurs like Elon Musk with just enough paranoia to call firms in his portfolio almost every day to make sure nothing is amiss.
The futility of playing against benchmarks like the Nasdaq 100 was underlined in a report last month by Bloomberg Intelligence, then got a widespread public airing by investor Chamath Palihapitiya, who said indexes provided superior gains “without you having to do any work or diligence.” Turns out intellect and hard work are pretty useless, too, thanks to dynamics that have increasingly come to dominate the active-management debate.
The trend might even be intensifying in the winner-takes-all modern economy. While the Russell 3000 is up 15% in 2023, the median return is about a 0.7% drop. A little more than half of the constituents are down. Predictably, a larger portion of managers that held all Magnificent Seven stocks beat their benchmarks on a one-year basis, writes David Cohne, a Bloomberg Intelligence analyst. But this wasn’t all too common: Just 18% of 971 mutual funds owned all seven names while 21% held none of them.
“We buy small positions and don’t sell,” Ron Baron, who has been running the fund since its 1992 launch, explained from his office. “The process is to try to find great businesses that have competitive advantage.” While finance 101 says diversification is the only free lunch, there’s some academic evidence that concentrated portfolios perform better, with some papers attributing that to the informational edge of skilled managers.
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