It’s hard to beat a benchmark when you’re condemned to be underweight the names driving the market higher.

That’s the plight of many large-cap mutual fund managers staring at another year of underperformance amid extreme market concentration in the handful of mega-caps riding the AI wave.

Fewer than three in 10 such funds managed to best their benchmark through Q3, according to the latest edition of Goldman’s quarterly update, released late last week. The historical average is 37%, as shown on the left, below.

The figure on the right gives you a sense of the perennial desperation. Cash allocations are at a record low of just 1.2% as managers try to capture at least some of the performance they’re otherwise doomed to miss.

“Mutual funds have increased their equity market exposure in recent months in a struggle to keep up with benchmarks,” Goldman’s David Kostin wrote, in the color accompanying the report.

I assume this goes without saying, but just in case: This is part and parcel of the self-fulfilling prophecy embedded in the ongoing active-to-passive shift. As more AUM gets indexed, more of every invested dollar goes to the largest stocks given that most passive products track cap-weighted benchmarks. The prevalence of the same handful of mega-caps in all manner of factor-based products and “smart beta” offerings, means flows are even more biased to that cohort, which means their market caps would swell even if they weren’t at the forefront on another epochal tech shift, which they are.

The more dominant those stocks become in the benchmark, the harder it is for active managers to keep up, leading to more underperformance which in turn begets more outflows. What comes out of active funds generally goes into passive funds, and around we go until, ultimately, there won’t be many (any?) large-cap active funds left. It doesn’t help that active fund expense ratios tend to be at least triple those for passive and even quasi-passive products.

The figure above, also from Goldman, shows you how hopeless this really is. When you’re perpetually 500-600bps underweight the market leadership and your fees are ~20-50bps punitive versus products that track cap-weighted benchmarks, you’re doomed.

Mutual funds, Kostin went on, “trimmed positions in most of the Magnificent 7 stocks last quarter [with] MSFT and AMZN ranked among the three stocks with the largest net decreases.”

Panning out to the broader tech space, mutual funds “remain extremely underweight TMT relative to the market” even after adding 46bps worth of exposure, Kostin said. “The underweight can largely be explained by the sector’s large weight in benchmark indices.”

Goldman’s analysis covers 550 active large-cap equity mutual funds with a combined $4.2 trillion in equity assets between them. Both of those numbers will be far lower 10 years from now.