Covered: Is active management finally set for a rebound?

Passives have been taking the lion’s share of flows but with where the environment is in terms of concentration, valuations and policy, active managers could be about to find themselves popular again… 

For more than a decade, active fund managers have endured one of the toughest market environments seen in generations.  

A concentrated handful of mega-cap US equities – latterly coined the ‘magnificent seven’ – have dominated returns, while small- and mid-caps have lagged behind. An increasingly downward pressure on fund fees and a hunt for value by advisers and DFMs has also led many to the alternative solution – the focus has been firmly on low-cost passive products. 

The data demonstrating active management’s recent struggles is stark. According to AJ Bell’s December 2025 Manager versus Machine report, just 24% of active funds have beaten a comparable index tracker over the last decade – the worst recording since the study began in 2021.  

UK active managers have fared even worse: only 16% outperformed in 2025, a dire year for managers targeting outperformance of a large-cap-driven, internationally focused market. 

“There’s no dressing it up – it’s quite simply been a dreadful decade for active fund managers,” Laith Khalaf, head of investment analysis at AJ Bell, says.   

“Year after year, active fund performance has continued to disappoint. The era of the star manager has now well and truly given way to the age of the passive machines.” 

As a result, a whopping £121bn has exited active funds over the past four years. Active fund performance and fees have been harder to justify for DFMs, in most cases.  

Yet, as we know markets move in cycles, after such a long time in the doldrums, some multi-asset managers are tilting carefully towards active managers again, pointing to the concentration risk in equities and an uncertain and constantly changing geopolitical environment as fertile hunting ground for active managers. Could this be a turning point?  

Portfolio Adviser speaks to multi-asset managers, CIOs and distribution leaders to find out if the tide is really turning.  

‘Pockets of outperformance’ 

As Khalaf points out, there have been some signs of active outperformance in recent years, but these have been “patchy and short-lived”. In the first half of 2025, for example, active managers in 44% North America and 51% Global sectors were outperforming their respective markets. This was, of course, at a time of heightened uncertainty as president Donald Trump delivered his trade tariff shock announcement. Some of the final tariffs were less punitive than expected and by the second half of the year the market had absorbed some of the expectations and passive funds were “speeding onwards and upwards” in H2 with only 25% of global managers and 22% of North American active funds outperforming in the second half up to 30 November. 

“There have been pockets where active management has worked, but there are also pockets where it hasn’t,” comments Paul Green, portfolio manager in the multi-asset solutions team at Columbia Threadneedle Investments (CTI). “It has been fairly tough for active managers over the past decade.” 

Caroline Shaw, portfolio manager within the Fidelity International multi-asset team, also adds: “Active in the US just hasn’t worked, because it’s just not built to work in an environment where a few narrow stocks lead the market.” 

Time to tilt 

Active funds tend to be underweight the largest stocks in the market, while passive funds are structurally overweight to the biggest players. Over the past decade, large caps have been the clear winners with 124.1% returns from the FTSE 100, for example, compared with 68.6% from the FTSE 250, and 82.2% from the Numis Smaller Companies index. 

Additionally, the market leadership has been narrow, concentrated around the ‘magnificent seven’ in the US. “The culprits for the hot then cold performance from US and Global active funds in 2025 are not hard to round up,” explains Khalaf. “The magnificent seven technology stocks are typically held in lower weights by active funds than their passive peers, and the see-saw performance of these stocks throughout the year goes some way to explaining why active managers experienced a false dawn at the beginning of 2025.” 

Strong performance has not been universal across all seven big tech names, but the group has still ended up performing better than the rest of the market as we approach the end of the year, he adds.  

Some investors have remarked, with the advances in technology and AI constantly accelerating, that the tech giants may never run out of steam, while others have likened the current market landscape to that of the dot-com boom in the late 1990s. And this is why, despite the grim stats for active fund managers, some asset allocators are looking at increasing active exposure.  

CTI’s Green says: “While we have seen the earnings growth of mega-caps continuing, it feels like that needs to flatten out a little, for the market to broaden and active managers have their time in the sun again.” Dan Kemp, chief research and investment officer for Morningstar, also told Portfolio Adviser: “There are more opportunities for active managers now than there has been over the last few years.” 

See also: Investors increase weightings to active strategies

Nedgroup portfolio manager Louis Hutchings shares a clear shift for the firm’s multi-asset portfolios this year due to concerns around concentration.  

“That constant concentration in the mag seven… I think it does make sense for us to lighten up on some of that passive exposure. That concentration risk is something of a slight concern for us. It has led us to look at other markets and increase our exposure to active managers.  

“We have shifted more towards active for a combination of reasons. Part of it is risk-based, but it’s also opportunity-based,” he says. 

Hutchings explains that Nedgroup’s multi-asset team has become “actively passive” within US exposure – using equal-weight, small-cap and stylistic tilts – while deploying true active exposure elsewhere. 

“We’re seeing quite a few opportunities now sprout up in places like Japan, Europe, emerging markets, frontier markets… places where active managers can add a lot of value.” 

Meanwhile, Fidelity’s Shaw says the multi-asset range has moved more active in the technology space while, alongside Nedgroup’s Hutchings, emphasises active opportunities in fixed income.  

“We sold [government bonds] earlier in the year and pivoted to strategic credit,” Shaw says. With high-yield and investment-grade spreads extremely tight, passive index exposure looks deeply unattractive. 

“If you get no reward for buying investment grade and not a lot more for buying high yield, why would you invest in a passive index?” 

Shaw’s team has increased allocations to strategic bond funds, EM debt and high yield, all in active funds. 

She also highlights opportunities in active UK equity funds.  

“One of the things that Artemis UK Select managed to do is outperform the S&P last year. If you’d been passively tracking the FTSE All-Share, you just weren’t getting what won in the UK last year.” 

Hutchings also notes the Artemis UK Select fund as a position that has been introduced at Nedgroup and comments on fixed income:  

“I think the fixed income space is super interesting as we have reached an inflection point. We have been through a period of QE, and super low rates where there wasn’t really much room for an active manager. It was almost all the ships are rising, and everyone was doing okay.” 

This has changed, he continues, as different regions are dealing with different rates of inflation and diverging central bank policies.  

“This provides quite a lot of opportunities for an active manager to be able to take advantage of the different curves and the different policy trends. That’s a place that is super exciting for active management right now.” 

Cost efficiency 

Not everyone is convinced, largely due to the fee pressure in the market. Most passive funds have an OCF of less than 0.5%, but data suggests the average could be closer to 0.12-0.18%. This is a stark contrast with actives where the OCF range is around 0.5-1.5%. 

James Sullivan, head of partnerships at Tyndall IM, says he is unsure on whether “peak passive” has been reached and it is unlikely passive allocations will come down significantly from here. “I’ve heard anecdotally that people have been allocating slightly more to active, but I’ve not really seen it en mass. My audience is the IFA community, and they still very much want cost efficient propositions, and that doesn’t really lend itself to having too much active in a multi-asset portfolio.”  

He also argues that while there may be selective opportunities for active to outperform in less efficient markets, giving Asia Pacific and small caps as examples, these are “smaller parts of the puzzle”.  

“These are not the big allocations. And there again lies the problem for active management. The biggest wedges are developed markets in the US, UK, Japan and Europe – it’s hard to argue why a passive doesn’t satisfy those allocations.” 

See also: Investing in passive is an active decision

Distribution heads also appear to be more sanguine about any form of active manager renaissance. Kate Dwyer, head of UK & northern Europe distribution at Invesco, noted rising demand for the active franchises at the group, but at the same time this has not been at the expense of passives.  

“We’ve definitely seen an increase in clients wanting to access our strong, core, active fundamental equity capabilities, as well as fixed income,” Dwyer says. 
“But I also haven’t yet seen a slowdown in ETF business… So there is still space and growth within the passives.” 

Jack Rose, head of distribution at Triple Point, also highlights a potential regulatory risk for investors shifting from passive to active in any significant way.  

“I can’t see why there will be a rotation out of passive, back to active. The cost is a big driver of that and as people really start to embed Consumer Duty, and have to have that demonstration of value, if you’re going to stop using a passive product and use a more active, focused portfolio management solution that’s higher in cost, you will need to be very robust on the value point. That could prove challenging. But who knows, it’ll be interesting to see how it plays out.” 

The middle ground to consider is of course active ETFs – a product for clients who want active skill paired with the liquidity and efficiency of the ETF wrapper. The products have been extremely popular in the US but without the equivalent tax breaks on offer and operational difficulties from a platform perspective, these have yet to see a significant uptake in the UK. Data from the end of last year showed active ETFs account for 0.42% of market share, while active open-ended funds made up 70.23%.  

However, asset managers clearly perceive there to be an opportunity; this year, Schroders, Royal London Asset Management and Jupiter are just a small number of asset managers to announce a move into the active ETF market, while others including Goldman Sachs Asset Management, J.P. Morgan Asset Management and Janus Henderson have expanded their active ETF range for UK investors.  

See also: Active ETFs: Existential threat or healthy competition for investment trusts?

Fighting chance  

From speaking to multi-asset investors there is clearly some appetite to delve back into active management funds again and active fund managers running fixed income, UK equities, emerging markets and small-caps may well find themselves popular moving forward.  

After years of passive funds reaping in large chunks of flows and mag seven’s ‘shoot the lights out’ performance, the arguments around concentration, valuation, index drift and diverging regional policies are convincing. At the same time, investors aren’t ditching passives in large swathes. The dull conclusion may be that blended portfolios will continue to play out and there may not be any hugely remarkable changes.  

But, finally, active management appears to be in a market where it once again has a fighting chance.