INVESTORS are “paying through the nose for underperformance” in the stock market by backing active fund managers, warns a financial adviser.
The long-running argument over whether investors should back active fund managers or passively track the market is intensifying as data highlights the scale of underperformance.
While active funds promise to beat the market, evidence increasingly shows that many fail to do so over the long term – often while charging significantly higher fees.
That gap between cost and outcome is becoming harder for investors to ignore, particularly in pensions and long-term portfolios where fees compound over time.
At the same time, the rise of low-cost tracker funds has made it easier than ever for investors to access broad market returns without paying for stock-picking expertise.
But the debate is far from settled, with some advisers arguing that a blend of approaches – rather than a strict active versus passive split – may offer the best results.
People are paying through the nose for underperformance
Martin Rayner, Director at Compton Financial Services, said the data shows that high fees are just not worth it.
He added: “The data on this is hard to ignore. Standard & Poor’s (S&P) S&P Indices Versus Active (SPIVA) research shows, for example, that in Europe, 97% of active funds underperformed the S&P Europe 350 over 10 years – yet investors are typically paying higher fees for them. In short, people are paying through the nose for underperformance. For most clients focused on long-term growth, particularly pensions, the priority is consistent returns with sensible costs.
“That’s why tracker funds make a strong case as the core of a portfolio. But it’s not just active versus passive. Many tracker portfolios are relatively static and only rebalanced periodically. There’s a strong case to consider a middle ground with Tactical Asset Allocation Trackers – using low-cost trackers but allowing for tactical shifts between regions based on the economic outlook to generate higher potential returns over a standard tracker.
“Active funds can still play a role in more specialist areas, but for many investors, approaches that combine low-cost tracking with some tactical flexibility may increasingly be the starting point.”
Eamonn Prendergast, Chartered Financial Adviser at Bromley-based Palantir Financial Planning, said higher fees may not be worth it.
He added: “For years, active managers argued that higher fees were the price of expertise. The problem is that the numbers increasingly tell a different story.
“Evidence continues to favour passive investing. SPIVA, a market leader in research between active and passive funds, has repeatedly shown that the majority of active managers underperform their benchmark over meaningful time periods, before you even consider how difficult it is to identify the minority that will outperform in advance.
“Once higher fees are factored in, the hurdle for active funds becomes even harder to clear. Investors are too often paying active charges for benchmark-like, or worse, below-benchmark returns. In most mainstream markets, passive funds offer a more efficient solution: lower costs, greater transparency and a higher probability of delivering a better net outcome over the long term.”
Examine what you’re actually buying
Rob Mansfield, Independent Financial Adviser at Tonbridge-based Rootes Wealth Management, said both have pros and cons.
He added: “Active funds have to earn their fees and there are lots that don’t. That’s not to say that all active funds are bad though. For ‘buy and forget’ type savings, passive funds have had a great run because money has concentrated into the largest companies, pushing up their share prices. Following that has been profitable.
“For certain stages in life, performance isn’t the only consideration. You might want a fund to generate an income yield in retirement or to try and focus more on capital preservation. Here, a well run active fund can have an edge.”
Paul Denley, CEO at London-based Oakham Wealth Management, said there needs to be a balance between active and passive.
He added: “Passive investing seems sensible, until you examine what you’re actually buying. The most popular equity indices are heavily concentrated: the S&P 500’s top 10 stocks reached a record 40% of the index in 2025, and the Morgan Stanley Capital International (MSCI) World Index is around 70% invested in the US. When you invested in the MSCI World Exchange Traded Fund (ETF), did you intend to actively allocate to US tech?
“Buying a tracker is often not a passive decision – it can be an active decision to overweight specific sectors or stocks. Active management earns its place where markets are inefficient or distorted and there is a stronger case for it in small companies than large.
“Targeted passive strategies such as factor and equal weighted ETFs can offer a middle ground, challenging market cap orthodoxy without the full fees of active management. Passive gives you the river, active can plot a course through the rapids. The real question isn’t active vs passive, it’s where each belongs. Pay for skill where it matters – commoditise what doesn’t.”
Antonia Medlicott, Founder & MD at London-based Investing Insiders, said fees may eat away at earnings.
She added: “There is a growing weight of evidence in favour of trackers which is directly leading to the surge in popularity for people seeking strong returns coupled with low costs. Conversely, over the long term, most active funds fail to beat their benchmark once fees are included. Strong returns from large US companies have also been hard to outperform for active managers.
“If you can get market-level returns for a lower cost, is it worth paying extra for the chance of underperformance? Unless you are one of the few benefiting from them, or can confidently say you know which assets provide better value or future opportunities, the answer is probably not. That said, active funds are far from redundant.
“There is still value to be had in less efficient areas of the market, but the challenge is selecting the winners in advance. For the majority of investors, trackers are likely to be the more reliable and often easier starting point, with active funds used selectively rather than by default.”
There is a growing weight of evidence in favour of trackers
Graham Nicoll, Financial Planner, Chartered FCSI at NCL Wealth Partners, said there is another type of fund – smoothed funds.
He added: “Advisers often fall into the camp of being a believer in tracker investing or active investing, although it is not always as binary as this. Tracker funds simply follow markets like the FTSE 100, offering low-cost, transparent returns that reliably match overall market performance.
“Active funds aim to beat the market through stock selection, but higher fees and inconsistent results mean many fail to outperform over time. There are also smoothed funds, often used in pensions, which reduce visible volatility by averaging returns, though this can mask risks and dampen long-term growth. In practice, trackers are widely seen as the most dependable core holding, while active funds can add value selectively and smoothed funds appeal mainly to more cautious or near-retirement investors.
“The key trade-off is between cost, consistency, and comfort where trackers maximise efficiency, active funds chase outperformance, and smoothed funds prioritise stability.”
Jordan Reid, Chartered Financial Planner at Serenity Financial Planning, said he has a “halfway house” between active and passive.
He added: “While active management can offer flexibility, it often comes with higher costs and the risk that a manager will make the wrong call. By contrast, a tracker investment strategy offers simplicity, lower costs and broad diversification to capture market returns while avoiding ‘manager risk’. There is a ‘halfway house’ between active investing and tracker funds.
“We use ‘factor-tilting’ – a quantitative approach based on decades of academic research – to target specific characteristics within investments like ‘Value’ or ‘Quality’ that have historically delivered improved outcomes. You get all the benefits of a tracker fund but with the longer-term potential to outperform. You can also reduce risk.
“An example is the over-concentration in a few massive tech stocks. A simple S&P 500 tracker is likely to see around 33% of your money invested in just seven companies. Our factor tilting reduces this exposure down to more like 11%, which is useful in case the AI bubble pops.”
There is an assumption that stock markets always go up
Adam Pickett, Independent Financial Adviser at Godalming-based McLaren Capital, said stock markets don’t always go up.
He added: “There is definitely a place for active fund management over passive. Passive funds have outperformed active over the last decade for a simple reason – the US has been the best performing region, and even more so, the biggest US companies have performed the best within this region.
“The consequence is that these companies, which have driven almost all of the passive performance, now account for a staggering share of most passive equity strategies. There is an enormous risk that should anything impact their future growth potential, these companies will underperform, and will drag most indices with it.
“There is an assumption that stock markets always go up, but in the 70s, the US stock market peaked in 73 and didn’t return until the 80s, and in the 80s Japan peaked and didn’t return until the 2020s. Eggs in basket.”
Photo by Towfiqu barbhuiya on Unsplash.
