The Week: The rise of passive faces a threat from US weakness

  • Active equity managers had an astonishingly poor success rate of 29.1% in 2024
  • Movements in markets in 2025 should give investors pause for though
  • Passive success has been predicated on the success of the US, which may not be such a selling point from here

Passive evangelists can congratulate themselves on a job well done. The latest Morningstar Active/Passive Barometer shows that active equity managers had an astonishingly poor one-year success rate of 29.1%, while the 10 year success rate is paltry 14.2%. However, the circumstances of passive’s success have been exceptional, and may be about to change. 

There has been no contest for passive equity managers over the past decade. The performance of the mega-cap technology stocks has made the major global indices almost impossible to beat. Even if they believed in the AI story, almost no active managers have been willing to hold the mega-caps in the same proportion as the index, even if their risk departments would allow it. Diversification alone has mitigated against active outperformance. 

It is notable that the phenomenon is evident to the same extent in bond markets. Active bond managers have seen an average one-year success rate of 53.5%, up from 46.5% a year earlier. That said, the lower fees in passive bond funds see the success rate for active managers drop to 26% over 10-years.

However, this data only runs to the end of December and the subsequent movement in markets should give investors pause for thought. Passive managers may argue that this is a short-term phenomenon, that AI will prove to be the powerful structural force that many expect, and Amazon, Nvidia et al will continue to dominate markets. 

That may be true, but given the caprices of the US administration, is it possible to justify a 73% weighting to the US stock market – as would be the case for an MSCI World tracker today?  It is possible to argue that these are all global companies, merely domiciled in the US, but that is not how investors see it. If they are irritated with America, US markets sell off. 

Equally, while AI may work out, these vast structural themes are unpredictable in their impact. It is an enormous single bet for investors. What about all those other growth themes that have been neglected in the pursuit of AI? The emerging market consumer? The energy transition? Ageing populations? Investors can buy in for a fraction of the cost of participating in the growth of AI.

Passive investing may still win over the next decade, but there is a question over the risks involved. Its success has been predicated on the success of the US, which may not be such a selling point from here. It is likely to be a stronger period for either active funds, or ‘alternative passive’ from here.