The ‘active versus passive’ debate is one that has raged for over two decades, with one investment style broadly dominating the other at any given time.
Active fund management relies on a skilled stock picker to select the investments for the portfolio. These carry higher fees and, in theory, ought to deliver better returns than simply tracking an index. But the ongoing trend of passive fund outperformance is calling this into question.
The spirit of diversification suggests rather than an either/or approach, a blend of the two is sensible, bringing together passive (or index-tracking) strategies to perform one job in a wider portfolio complemented by a few actively managed investments performing their own specialist roles.
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Yet recent research by AJ Bell suggests the case for active management is increasingly hard to support.
The research, published in the investing platform’s latest Manager vs Machine report, found that just 42% of active funds outperformed a passive alternative during the first half of the year.
Which active funds struggle to keep pace?
Some bright spots emerged over the six-month period, appearing to divide developed and emerging markets.
While only 22% of global active funds beat their average passive equivalent, UK-focused actively managed funds fared even worse; just 19% beat their passive peers in the first half of 2026.
“Fund managers with a global equity remit have a vast universe from which to find the best opportunities. Sadly, it looks like many were fishing in the wrong places,” said Dan Coatsworth, head of markets at AJ Bell.
He said the handful of global equity managers that outperformed did so by a significant margin but overall the data was a “huge embarrassment for the active fund management industry”.
Global trackers, according to Coatsworth, have become the default choice for first-time investors. “Low costs and broad exposure to companies around the world make them easy-to-understand investment products. For some people, that’s all they need.”
The issue wasn’t just a short-term concern. He said the five and 10-year data suggests persistent underperformance of active global equity funds.
“Part of the problem is down to market concentration, with global indices heavily driven by a handful of stocks dominated by the technology sector. Any manager with less exposure to these blockbuster names than the global benchmark might have struggled to outperform.”
The MSCI World index, for example, has more than 1,200 constituents but the top 10 account for more than 25%.
How have other active fund sectors fared?
Conversely, almost two-thirds of active funds from the Asia Pacific ex-Japan (65%) and Global Emerging Markets (63%) sectors beat their passive counterparts.
With 42% of active funds outperforming in the first half of 2026 – the same reading as a year earlier – it’s no wonder passive funds are grabbing investors’ attention, said Coatsworth.
“We’ve had yet another six-month period where a large chunk of professional stock pickers failed to deliver the outperformance they’re being paid to do.”
Several factors are often at play.
In the report, Coatsworth flagged how certain sectors – such as gold mining, defence, pharmaceuticals and biotechnology – that were stronger in 2025 lost momentum in the first half of 2026. “Active managers might have been caught out by the rotation and didn’t move fast enough, or they were simply parked in the wrong sectors to beat their passive counterparts,” he said.
Dan Cartridge, fund manager at Hawksmoor Fund Managers, cited an academic paper that shows average active fund management performance started to decline after 2010, when passive funds grew from 19% market share to 50% market share.
He described how declining fund manager performance wasn’t necessarily down to declining skill.
The paper, by Hannah Unterberg of University of California’s business school, suggests that hefty flows away from active management into passive are contributing to the underperformance of the actively managed funds, causing a significant ‘headwind’ for active managers.
Picture it like this: if money moves out of an active fund into a passive one, the manager of the active fund needs to sell some holdings to honour those withdrawals. The likelihood is that the holdings they’re selling will be their favoured (but less popular) stocks. These will likely be the same stocks that gave them an ‘edge’ previously, in terms of performance.
Irrespective of whether you invest passively or actively, Cartridge said it was about understanding what you own and the risks you’re taking.
His team’s flagship multi-asset fund, Hawksmoor Vanbrugh, launched in 2009 and has beaten a typical 60/40 equity/bond passive mix since inception, despite the “apparent structural headwind”.
Cartridge added: “We champion a blended approach. No one has solved investment, and styles and approaches come in and out of favour.
“Despite the 15-odd years where passive has performed well, that doesn’t mean it will continue indefinitely. There have been long windows over the past 15 years where active funds have performed well.”
Does the asset class matter, when choosing active or passive?
When it comes to fixed income, specialist consultancy Fairview Investing only really uses passive for US Treasury investments. Ben Yearsley, investment director, said: “I don’t really believe in passive management for corporate bonds because you’re basically just rewarding the biggest debtors. I typically believe in active for corporate bonds, complemented by passive for government bonds.”
In equities, certain markets generally lend themselves better to index investing. The larger, more liquid, more widely researched a market is, the less chance an active manager has to discover price discrepancies or hidden gems that aren’t widely known by their peer group.
Active managers typically struggle to beat a US large-cap index, whereas smaller and mid-cap stocks tend to offer a better hunting ground for active stock pickers – in any market, not just the US.
Elsewhere, he says Europe is a better landscape for active stock selection, given its national diversity; by industry, economics, regulation and corporate culture.
Fairview takes a blended view, typically using a passive core, with more specialist active satellite positions.
Cartridge concurs, saying the point of adding active positions is to do something you’re not already getting exposure to in your passive investments, otherwise you’re just doubling down and duplicating positions.