Passive investment strategies continue to outperform active ones, even amidst increased returns from Trump's tariffs
In a world where passive investment funds have been dominating the market, active management strategies have been facing a challenge to deliver consistent outperformance. According to data from AJ Bell, while active funds have generally struggled to significantly outperform passive funds in broad market categories like large-cap equities, there are certain sectors and regions where active funds have shown promise.
Over the past decade, large-cap equity funds have underperformed passive index benchmarks substantially, with as much as 70-80% of active funds underperforming benchmarks such as the S&P BSE 100. However, in regions like Asia, active funds have had stronger justification for outperformance by exploiting opportunities beyond major index constituents. The rising market and sector concentration in passive indexes means active investors can seek less popular stocks and investments outside the main indexes, often capturing more attractive valuations and returns.
No IA sector has a majority of active funds outperforming passives over the past five years, and innovations like buffer ETFs that blend passive elements show widespread underperformance relative to benchmarks in the last decade. This reinforces the challenge for active or managed strategies to beat passive benchmarks consistently.
However, there are some exceptions. Specialized sectors like senior loans, MLP (Master Limited Partnerships), and certain hybrid/balanced funds have shown differentiated performance, but these are specialized income or credit-related asset classes rather than broad equity sectors.
In the case of global emerging market funds, they have seen the highest level of active outperformance over the last ten years, at 56%. During the first half of 2025, 42% of active funds outperformed passive equivalents, an improvement from the first half of 2024. Over the last five years, only 26% of active funds have outperformed passive alternatives.
Active funds have significantly underperformed lower-cost index funds overall, but the performance of active funds is being closely monitored and analyzed by AJ Bell. Laith Khalaf, head of investment analysis at AJ Bell, stated that Donald Trump's tariffs created an opportunity for active managers to demonstrate their worth.
In the UK, mid and small caps have lagged behind the FTSE 100, contributing to poor performance by UK-focused active managers. Just 29% of UK active funds have beaten the average passive fund, while 68% of active funds that invest in Japan outperformed passive equivalents in the first half of 2025.
In summary, sectors where active funds significantly outperformed passive funds over the past decade appear largely limited to less efficient or niche markets such as Asia ex-Japan equities and specialized credit or alternative income sectors, rather than broad equity categories. Beginner investors who are unsure which funds to add to their portfolio can read our explainer on investment funds for beginners. It's important to note that investors can improve their odds of achieving their desired investment outcome by seeking out managers who have demonstrated skills in both stock picking and building a portfolio that genuinely differs from the benchmark. As of 30 June 2025, 30% of active funds outperformed passive counterparts, marking a record low.
[References] [1] https://www.ajbellmedia.co.uk/research/insights/passive-funds-can-carry-hidden-risks-in-todays-concentrated-markets/ [2] https://www.ajbellmedia.co.uk/research/insights/why-active-funds-can-outperform-passive-funds-in-asia/ [3] https://www.ajbellmedia.co.uk/research/insights/are-active-funds-a-better-bet-than-passive-funds/ [4] https://www.ajbellmedia.co.uk/research/insights/the-role-of-active-funds-in-portfolio-construction/
- Despite the challenges faced by active funds in delivering consistent outperformance, particularly in broad market categories like large-cap equities, they have shown promise in certain sectors and regions, such as Asia where active funds have demonstrated stronger justification for outperformance.
- It is noteworthy that in the context of Donald Trump's tariffs, active managers have had an opportunity to demonstrate their worth, as evidenced by the improved performance of active funds that invest in Japan, compared to their passive counterparts.
