The ‘active versus passive’ debate has raged for over two decades, with one investment style broadly dominating the other at any given time.
Investing platform AJ Bell’s latest Manager vs Machine report, found that just 42% of active funds outperformed a passive alternative during the first half of the year – despite typically charging higher fees than passive counterparts.
Analysis from investment research company Morningstar has backed up the notion that active managers underperformed passives during the first six months of 2026. Morningstar analysed the performance of around 32,000 active and passive Europe-domiciled funds (accounting for around half the assets in the European fund market).
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It found that, during the first six months of 2026, the one-year success rate for active equity managers (the percentage of active funds that both survive and outperform comparable passive alternatives over the last year) fell to 28.4%, from 30.5% at the end of 2025. Active managers’ success rates fall further over longer time periods, too: the figure stands at 20.3% over three years, 15.2% over five years and 11.9% over 10 years.
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“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,” said Dan Coatsworth, head of markets at AJ Bell.
Given that active funds usually charge higher fees, why are they underperforming compared to passives?
Which active funds struggle to keep pace?
AJ Bell identified certain areas where the performance divergence between active and passive funds was especially marked.
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.
Coatsworth 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.”
But this has led to heavy market concentration, particularly in large US technology companies.
The MSCI World index, for example, has more than 1,200 constituents but the top 10 account for more than 25% of its total assets.
“Part of the problem is down to market concentration, with global indices heavily driven by a handful of stocks dominated by the technology sector,” said Coatsworth. “Any manager with less exposure to these blockbuster names than the global benchmark might have struggled to outperform.”
Similarly, Eugene Gorbatikov, passive strategies analyst at Morningstar, said that high concentration had made it “difficult for active managers to keep pace with the momentum generated by the technology sector”.
Coatsworth pointed out that 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.
There is an argument that active managers’ underperformance isn’t related to skill, but is to some extent inevitable given the rise in popularity of passive funds.
By definition, market cap-weighted index funds (which are a natural choice for most inexperienced investors) act to boost the market caps of larger companies when their share price is rising.
An academic study by Hannah Unterberg of the University of California’s Paul Merage School of Business, published in June, attributed the decline in active manager performance to the rise of passive funds, especially after 2010.
It made the case that any time money leaves an active fund and goes into passive funds, this hampers an active manager’s performance – because they are forced to sell holdings, especially the stocks that are least popular but in which the manager has high conviction. In other words, the ones that are supposed to give them an ‘edge’.
Perhaps it’s not about picking either active or passive, but about recognising the potential advantages and shortcomings of each.
“We champion a blended approach,” said Dan Cartridge, fund manager at Hawksmoor Fund Managers. “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.”
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.
Does the asset class matter when choosing active or passive?
Cartridge added that it is worth making sure that your active positions are used to gain exposure to something you don’t already have via passive investments – otherwise you’re just doubling down and duplicating positions.
There are also discrepancies in the relative performance of active and passive funds in different asset classes.
Morningstar’s analysis found that active bond managers tend to outperform active equity managers – though even in this category, one-year success rate fell to 46.8%, from 54.8% at the end of 2025.
There is also some discrepancy within equity funds. AJ Bell found that almost two-thirds of active funds from the Asia Pacific ex-Japan (65%) and Global Emerging Markets (63%) sectors beat their passive counterparts.
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.
