Active funds have had a difficult decade, but the reasons for their weakness are clear.
- Just 24% of active managers have beaten a comparable tracker over 10 years
- In the UK, just 16% of UK All Companies managers have outperformed a passive equivalent over one year
- Exposure to the Magnificent Seven is a dividing line between the performance of active and passive strategies
It’s been a woeful decade for active funds, with just 24% beating a comparable tracker over 10 years, according to the latest AJ Bell Manager versus Machine report. It was even worse in 2025, with just 16% outperforming a passive alternative, in spite of greater diversification in market leadership over the year. However, it is not necessarily a sign to avoid active funds.
In many ways, the underperformance appears inevitable. When a handful of vast technology companies dominate returns, active managers are always likely to struggle. From a risk management point of view, they can’t possibly hold these companies at their index weight. AJ Bell says that exposure to the Magnificent Seven is a dividing line between the performance of active and passive strategies.
However, while it explains the active/passive divide in the global and US sectors, it does not explain the gap in the UK and Europe. This can largely be explained by the weakness of smaller companies. In the UK, where just 16% of UK All Companies managers have outperformed a passive equivalent over one year and just 13% over five years, six stocks have delivered almost all the returns for the year to date – Rolls Royce, HSBC, Lloyds, Barclays, NatWest and BAE.
Europe has also been vulnerable to the same large-cap dominance. With the majority of active managers plying their trade in smaller companies, where there is more mispricing to exploit, large-cap outperformance inevitably discriminates against them.
Laith Khalaf, head of investment analysis at AJ Bell, says the results are “heavily influenced by longstanding market conditions, rather than simply stemming from a structural flaw in active management per se. A resurgence in small and mid caps could help lift the numbers towards respectability for active managers, likewise the big blue chips coming a cropper.”
The outperformance of passive is far less evident in areas such as global emerging markets or Japan, where this large cap/small cap phenomenon hasn’t been as strong. The AJ Bell study found that 48% of emerging market managers had outperformed a passive equivalent for the year to date. Over five years, this figure is 42% and over 10 years 48%. In Japan, the figures are 52% over one year, 36% over five years and 53% over 10 years.
Active funds have seen £121 billion of outflows in the last four years. This has helped reinforce the large cap/small cap phenomenon. A contrarian might suggest that this has created opportunities on the other side. Certainly, smaller companies across the world look cheap and unloved. It may have been a tough time for active funds, but it does not derail the case for them in the longer term.
