Is active management still important when it comes to active versus passive funds?

According to new research, the majority of active funds still perform worse than their average passive counterparts

Which strategy is most effective for you?

For more than 20 years, there has been a heated debate about active versus passive investing, with one approach generally outperforming the other at any given moment.

To choose the investments for the portfolio, active fund management depends on a competent stock picker. These are more expensive and should theoretically yield higher returns than just following an index. However, this is being called into question by the continuous trend of passive fund outperformance.

It makes sense to combine passive (or index-tracking) strategies to accomplish one task in a larger portfolio with a few actively managed investments fulfilling their own specialized roles, according to the spirit of diversification, rather than taking an either/or approach.

However, according to recent research by AJ Bell, it is becoming more difficult to defend the idea of active management.

Watch the entire video here. According to the research, only 42% of active funds beat a passive alternative in the first half of the year, according to the investing platform's most recent Manager vs. Machine report.

Which active funds are having trouble keeping up?

Over the course of the six months, certain bright spots appeared that seemed to separate developed and emerging markets.

In the first half of 2026, UK-focused actively managed funds performed even worse, with only 19% outperforming their passive counterparts, compared to just 22% of global active funds.

"Fund managers with a global equity mandate have access to a wide range of opportunities. Dan Coatsworth, head of markets at AJ Bell, stated, "Unfortunately, it appears that many were fishing in the wrong places.

According to him, the data was a "huge embarrassment for the active fund management industry" overall, with only a few global equity managers outperforming by a sizable margin.

Coatsworth claims that first-time investors are increasingly choosing global trackers. They are simple-to-understand investment products due to their low costs and extensive exposure to businesses worldwide. That is sufficient for certain individuals."

It wasn't a temporary problem. According to him, the data spanning five and ten years points to ongoing underperformance of active global equity funds.

"A small number of technology-related stocks dominate global indices, which contributes to market concentration. It might have been difficult for any manager to surpass the global benchmark if they had less exposure to these well-known brands."

For instance, the top 10 make up more than 25% of the MSCI World index, which has over 1,200 constituents.

What is the status of other active fund sectors?

In contrast, nearly two-thirds of active funds from the Global Emerging Markets (63%) and Asia Pacific ex-Japan (65%) sectors outperformed their passive counterparts.

According to Coatsworth, it's understandable why passive funds are attracting investors' attention given that 42% of active funds outperformed in the first half of 2026the same reading as a year earlier.

"For the past six months, a significant portion of professional stock pickers have not performed at the level for which they are compensated."

Numerous factors are frequently involved.

Coatsworth noted in the report how some industries, including biotechnology, pharmaceuticals, gold mining, and defense, which were more robust in 2025, lost steam in the first half of 2026. He stated, "Active managers may have been caught off guard by the rotation and failed to move quickly, or they were just parked in the wrong sectors to outperform their passive counterparts."

According to an academic study cited by Dan Cartridge, fund manager at Hawksmoor Fund Managers, average active fund management performance began to deteriorate after 2010, when passive funds increased their market share from 19% to 50%.

He explained how declining skill wasn't always the cause of declining fund manager performance.

According to Hannah Unterberg of the University of California's business school, large flows from active to passive management are causing the actively managed funds to perform poorly, which is a major obstacle for active managers.

Imagine this: if funds are transferred from an active fund to a passive one, the active fund manager must sell some holdings in order to cover the withdrawals. It is likely that the stocks they are selling are their preferred, albeit less well-known, stocks. These are probably the same stocks that previously provided them with a performance advantage.

Cartridge stated that it's important to know what you own and the risks you're taking, regardless of whether you invest actively or passively.

Despite the "apparent structural headwind," his team's flagship multi-asset fund, Hawksmoor Vanbrugh, has outperformed a standard 60/40 equity/bond passive mix since its inception in 2009.

"We support a blended approach," Cartridge continued. Investing is a problem that no one has solved, and different approaches and styles are popular at different times.

"Even though passive has done well for the past fifteen or so years, this doesn't mean it will last forever. Over the previous 15 years, there have been extended periods of strong performance for active funds."

Does the asset class affect the decision between active and passive investing?

In terms of fixed income, US Treasury investments are the only ones that specialist consultancy Fairview Investing actually uses passive. Investment director Ben Yearsley stated: "I don't really believe in corporate bond passive management because you're essentially just rewarding the biggest debtors." For corporate bonds, I usually favor active, while for government bonds, I favor passive."

Certain stock markets are typically better suited for index investing. An active manager's chances of finding price disparities or hidden gems that their peers aren't aware of are reduced in larger, more liquid, and thoroughly studied markets.

Smaller and mid-cap stocks typically provide a better hunting ground for active stock pickers in any market, not just the US, but active managers usually find it difficult to outperform a US large-cap index.

In other places, he claims that because of its national diversity in terms of industry, economics, regulation, and corporate culture, Europe offers a better environment for active stock selection.

Fairview adopts a hybrid approach, usually combining more specialized active satellite positions with a passive core.

Cartridge agrees, stating that the purpose of adding active positions is to do something that your passive investments aren't already exposing you to; otherwise, you're just doubling down and duplicating positions.