Passive funds are “eating the lunch” of their active counterparts, with just a third of active funds beating their passive counterparts across the past decade, and only 31% outperforming in 2024, according to AJ Bell.
The performance gap has been magnified in global and US funds, as the magnificent seven drives returns for indices. Only 17% of global funds outperformed the passive alternative in this year’s research, the worst reading since AJ Bell began the report in 2021.
However, even in markets that haven’t enjoyed the magnificent seven boost, such as the UK, active funds haven’t managed to find the edge. In 2024, just 35% of active UK funds beat out passive.
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Laith Khalaf, head of investment analysis at AJ Bell, said: “Make no mistake, passive funds are eating the lunch of active managers, and the continued strong performance of index trackers will do nothing to staunch this trend.
“Whether you look at the short term or zoom out and take a wider perspective, the picture remains dismal for active managers, and it’s the influential Global and North America sectors where a lot of the damage is being done.”
Without factoring in US and global funds, 44% of active funds were able to outperform the index across ten years. Japan and global emerging markets were the only two sectors where the majority of active funds outperformed passive across a decade, at 52% for each. In the past five years, no sector has had a majority of funds beat the passive alternative.
“The long-term performance of tracker funds in the key US and Global sectors has been nothing short of astonishing,” Khalaf said.
“The idea that a plain vanilla US tracker fund could quadruple your money in a decade would have been beyond the wildest dreams of all but the most overconfident investors. Yet that is precisely what has unfolded in the last 10 years. Indeed, over just the first 11 months of 2024, the average US tracker returned 27.6%.”
The pattern of underperformance has started to take a toll on flows. In the past three years, active funds have experienced outflows of over £100bn. While passive funds have pilfered some of this cash flow, a net £56bn has been withdrawn across all open-ended funds across the last three years. ETFs, bitcoin, investment trusts, expenditure, mortgages and savings in cash also act as competitors for active funds, Khalaf noted.
“It’s reasonable to suppose that the surge in passive fund sales must end somewhere, but we may still be a long way from that point. Trackers currently make up 24% of funds run by Investment Association members,” Khalaf said.
“But in the US, the value of assets in passive funds overtook active funds for the first time last year, according to Morningstar. In other words, more than 50% of fund assets were invested passively. The index investing megatrend began in the United States, so it sets a meaningful roadmap of where the UK investment industry may end up. In other words, don’t bet the house on a revival in active management anytime soon.”
