Passive fund dominance and market concentration have become such a self-fulfilling spiral that the market could slide into a larger-scale version of the Neil Woodford scandal, according to Simon Evan-Cook, multi-asset manager at VT Downing Fox.
What went wrong for Woodford was that because he had so much money coming in, he bought small and mid-cap companies and pushed their prices up, the Downing Fox manager explained.
“Because he pushed the price up, his fund performed well, and so people bought more of the fund.
“He essentially created and bought his own performance.”
This worked to a point; however, when Woodford experienced the first set of exits, this spiralled into a significant underperformance.
For the Downing Fox manager, modern markets seem to have the conditions for a similar spiral.
“My concern is that we’re about to see Woodford repeated at an almost market level,” he told Portfolio Adviser.
Over the past decade, the market has been pulled upwards and become increasingly concentrated.
For example, he pointed to emerging markets where TSMC represents 13% alone, a larger allocation than India within the global market.
See also: Alex Funk: Concentration feels dangerous, but history says otherwise.
As these markets have become increasingly concentrated, asset managers have followed if they wanted to keep up, he said.
This, in part, has been a consequence of the dire performance of active fund managers, he conceded.
According to AJ Bell’s Manager vs Machine report at the end of 2025, just 20% of active fund managers have beaten a passive alternative over the past five years.
As a result, money has been increasingly funnelled into passive funds, which have outperformed by buying more of the top-performing stocks, he said.
“While you’ve got this build-up of passive money going on, it’s in effect buying and pushing up its own performance,” just like Woodford did, the Downing Fox manager explained.
See also: IA: Inflows jump to £2.4bn as active funds beat trackers
“One of the original arguments for passive funds was that you’re accepting average performance, for lower charges.
“When you have smoked the average active fund manager by double-digit percentages, that argument doesn’t hold up,” Evan-Cook noted.
He warned: “If you can beat the average fund by double-digit percentages, you can almost certainly underperform it by that much too.”
An ‘old school’ portfolio
For Evan-Cook, this means a diversified portfolio is essential.
“If you look at portfolios 10 years ago, most investors ran what you would call a diversified portfolio: they used to have a decent number of small caps, some mid caps and some large caps,” he said.
This is the sort of portfolio that his Downing Fox range is attempting to be, as investing purely in top-performing large caps looks increasingly risky, he argued.
“We’re committed to be an old-school, diversified multi-asset fund manager, because it’s dangerous not to be.”
Stocks at the top of the index look increasingly expensive, and things only need to go slightly differently to how the market expects to create a “quite painful” situation for some investors, Evan-Cook said.
“All AI companies have to invest like they’re going to be the only AI company, meaning multiple companies are investing as if they’re a monopoly.” He added: “On that very basic measure, we may have multiple times more AI capacity than we need.”
This supply and demand dynamic could lead to some large, concentrated AI stocks underperforming.
While some mega caps looked risky and expensive, the other end of the market cap had some of the “best opportunities in a generation”, he said.
One area of interest is the UK, where most managers have had a “pretty horrible three years”.
See also: Covered: The renaissance of the UK market
However, this means there are “incredible opportunities in UK small caps” where brilliant, world-leading companies are now attractively priced and catching managers’ attention.
For example, he pointed to the Premier Miton UK Opportunities fund, an all-cap fund run by Matthew Tillit.
“He’s prepared to go wherever in the UK market he finds the best ideas,” Evan-Cook said. “But that fund is effectively a small-cap value fund, because that’s where he is finding all of the best ideas.”
That said, mid and small-cap value stocks looked well positioned across the board, he noted. As an example, he pointed to estimates from Morningstar and Research Affiliates (RA), which suggest that US large-cap growth may lose money over the next 10 years, while investing in American large-cap value may only make about 2%.
Meanwhile, RA estimated investors could make as much as 8% per year from non-US small-cap value stocks, or 5% from small-cap value in the US.
“I can understand why you wouldn’t put all your money into smaller companies, but why would you avoid them completely?” he concluded in his most recent investment letter.
