Despite Trump's tariff measures, actively managed funds continue to trail behind passively managed ones
In the world of investments, the debate between active and passive funds continues to rage. According to Laith Khalaf, head of investment analysis at AJ Bell, active funds have on the whole significantly underperformed lower-cost index funds. However, the picture is not entirely bleak, as the report reveals that active funds can potentially lead to far greater returns than the average passive fund in certain sectors.
The UK sector, for instance, has seen a mixed performance. While 29% of active funds outperformed passive counterparts during the first half of 2025, UK-focused active managers have struggled, with just 29% of UK active funds beating the average passive fund. This underperformance can be attributed to the lag in mid and small caps in the UK, which have struggled to keep pace with the FTSE 100.
The story is different in more specialized markets. In the first half of 2025, a small majority of active funds with a Global focus outperformed their passive counterparts. The sector that saw the most significant active outperformance was Japan, where 68% of active funds that invest in Japan outperformed passive equivalents. If Japan-focused active funds are filtered out, only 11% of Asia Pacific ex-Japan active funds have beaten the average passive fund this year.
Over the past decade, the sectors where active funds have outperformed passive funds most notably include Japanese equity and global emerging markets. Specifically, around 68% of active funds investing in Japan outperformed their passive benchmarks in the first half of 2025, and over the last ten years, Japanese active funds have a roughly 50% outperformance rate. Emerging market funds saw the highest active outperformance over ten years at 56%.
In contrast, the worst active fund performance has been in major developed markets such as the US, UK, and global sectors, with very low active outperformance rates over the last decade. Overall, just 30% of active funds across seven equity sectors outperformed passives in the past decade, marking the lowest long-term performance for active management on record.
Beginner investors who are unsure which funds to add to their portfolio can refer to an explainer on investment funds for beginners. Seeking out managers who demonstrate skills in stock picking and building a portfolio that genuinely differs from the benchmark can improve the odds of achieving investment goals.
However, it's important to note that even in the most promising sectors, passive funds can carry hidden risks in today's concentrated markets. It's crucial for investors to understand the unique risks and potential rewards associated with both active and passive funds before making investment decisions.
In conclusion, while active management tends to outperform in more specialized or less efficient markets like Japan and emerging markets, it struggles significantly in large, efficient markets like the US and UK. No sector over the past five years had a majority of active funds consistently beating passive funds. Therefore, a balanced approach, considering both active and passive funds, could be the key to successful investing.
[1] AJ Bell, "Active funds have underperformed lower-cost index funds on the whole, says AJ Bell", 2025. [2] AJ Bell, "Active funds outperform passive counterparts in Japan and emerging markets", 2025. [3] AJ Bell, "Major developed markets see low active outperformance rates", 2025. [4] AJ Bell, "Active management struggles in major markets, outperforms in specialized sectors", 2025.
- In specific sectors like Japan and global emerging markets, active funds have outperformed passive funds, as evidenced by the reports from AJ Bell, particularly in the first half of 2025, where around 68% of active funds investing in Japan outperformed their passive benchmarks.
- Personal-finance enthusiasts who are eager to invest in personal finance should consider the finding that active funds focusing on personal finance or similar specialized markets can potentially lead to significant returns, as illustrated by the difference in the performance of active funds with a Global focus compared to their passive counterparts in the first half of 2025.
- While tariffs can impact various aspects of finance and investing, it's essential for investors to carefully weigh the unique risks and potential rewards associated with both active and passive funds, especially considering the often-disappointing performance of active funds in large, efficient markets like the US and UK, as demonstrated in the AJ Bell reports of the past decade.
