The Quiet Comeback of Active Funds – What’s Behind the Shift

In the UK, around 25% of retail investment assets are held in tracker (passive) funds, according to the Investment Association. In the US, the shift has been even more dramatic, with over 50% of fund assets now in passive strategies. It's easy to see why: with passive investing, you know your return — it mirrors the market — and you benefit from low costs and simple structures.

The narrative around passive investing has understandably dominated for years. It's an easy sell: low fees, clear returns, and no need to 'beat the market.' And indeed, multiple studies — such as the SPIVA® U.S. Scorecard — have regularly shown that most active managers underperform their benchmarks over the long term.

Yet, a more nuanced picture is beginning to emerge.

Rather than framing it as a binary choice — passive or active — more investors are recognising that different styles work in different markets. For example, active management often dominates in less efficient markets such as emerging markets, smaller companies, or fixed income, where opportunities for mispricing are greater. Conversely, in highly efficient markets like large-cap US equities, passive strategies often hold the advantage.

What’s becoming clearer is that investors no longer have to settle for the average. A thoughtful blend of active and passive strategies can, over time, lead to above-average outcomes, especially when compounding returns are considered. It’s perhaps this growing realisation — that combining approaches can optimise performance — that is driving the quiet but noticeable resurgence of interest in active funds.

A Look Back: The Rise of Passive Investing

The rise of passive investing can be attributed to several converging factors. The post-financial crisis era saw vast amounts of money pumped into the markets, alongside a period of low interest rates and low inflation, which arguably favoured a broad-based, market-tracking approach. At the same time, the growth of DIY investing changed the way many individuals approached their financial futures.

Driven largely by cost-consciousness, DIY investors increasingly turned to passive strategies. Much like the home improvement boom — where many believed they could plumb a bathroom only to later call in a professional — many investors initially underestimated the challenges of managing their own investments. Low-cost trackers appeared to offer an easy, low-risk solution.

In the US particularly, passive fund flows have overtaken active in recent years, reshaping the investment landscape. Investor behaviour has also shifted. Instead of buying and holding individual stocks, there is a greater tendency to trade — making ETF structures, which can be bought and sold quickly and cheaply, an especially attractive option.

Passive investing wasn't just a trend — it became a mindset: low cost, efficient, easy to understand, and always available at the click of a button.

Why Active Funds Are Making a Quiet Comeback

Just as certain conditions favoured the rise of passive investing, today's environment is increasingly playing to the strengths of active managers.

The End of Free Money

For over a decade, ultra-low interest rates and quantitative easing created a backdrop where almost every asset class rose in value. Many investors have never experienced a "normal" environment of higher interest rates and inflation. In this new reality, cheap money is no longer fuelling indiscriminate market gains, and value matters again. Active managers have the flexibility to avoid overpriced sectors and companies, positioning portfolios more selectively.

Market Volatility and Dispersion

While volatility is not new, it now comes with greater dispersion between winners and losers. In more volatile markets, passive strategies simply buy everything — good and bad — while active managers can pick their spots, taking advantage of pricing inefficiencies and navigating risk more dynamically.

Changing Macroeconomic Conditions

Rising geopolitical tensions, slower global growth, and shifting monetary policies have made broad market investing more challenging. In such uncertain environments, active managers can be more nimble, adjusting sector allocations, currency exposures, and risk profiles in real time — advantages passive funds simply don't offer.

Sustainability and ESG Factors

There remains considerable confusion around ESG investing. Many passive "ESG" indices focus on business metrics like governance, not necessarily true environmental or social impact. For example, the FTSE4Good Index includes oil majors and mining companies — highlighting that ESG scoring often rewards good governance rather than environmental leadership.

Understanding an investment’s true sustainability credentials often requires more than just a label — it demands active engagement and disciplined exclusion strategies that are typically only achievable through active management. Investors seeking genuine alignment with sustainability goals increasingly recognise the importance of active oversight.

Where Active Management Is Seeing Most Success

Rather than seeing active and passive investing as opposites, it’s more helpful to view them through the lens of investment styles and market types. There are certain areas where active strategies consistently demonstrate a natural advantage:

Sustainability, ESG, and Impact Investing

When it comes to responsible investing, active management often plays a crucial role.Passive ESG funds typically track broad indices that screen companies based on predefined metrics, but they rarely offer a deep understanding of true sustainability practices or positive social impact.

In contrast, active managers can build genuinely aligned portfolios — applying detailed exclusion policies, proactively engaging with companies, and even targeting positive impact outcomes.

Emerging Markets

Emerging markets are diverse, complex, and less efficient than developed markets.Tracking an emerging market index can expose investors to political risks, governance issues, or over-concentration in dominant sectors. Active managers add value by avoiding weaker companies and seeking out under-researched, high-growth opportunities.

Smaller Companies and Niche Markets

Small-cap stocks and specialist sectors are another area where active management shines.

Many smaller companies receive limited analyst coverage, meaning there is more scope for skilled managers to uncover undervalued opportunities or avoid hidden risks. Similarly, niche sectors — such as biotechnology, clean energy, or frontier markets — often require deep research and industry knowledge that passive strategies are not equipped to deliver.

Challenges Still Facing Active Funds

One common misconception is that passive investing requires no research. In reality, whether choosing active or passive strategies — or blending different styles — it is vital to understand what sits beneath the bonnet. Even passive funds vary widely in construction, concentration risks, sector biases, and ESG integration.

However, active funds arguably demand an even greater level of due diligence.

Investors and advisers must not only assess past performance but also understand a manager's investment style, process, and philosophy — including when that style might be out of favour and how the fund might behave across market cycles.

Another ongoing challenge for active funds is fees.

While active managers offer the potential for outperformance, higher charges can erode returns, especially during periods of modest market growth. The pressure to demonstrate value after fees remains intense — and rightly so.

Selecting the right active funds requires patience, research, and realistic expectations. Without this, the risk of disappointment — and underperformance — remains high.

What This Means for Investors

The key takeaway is that investment styles can be blended thoughtfully to create better outcomes for investors.

Cost no longer needs to be the sole deciding factor. For example, a Managed Portfolio Service (MPS) blending active and passive strategies recently offered a total charge of just 0.29% — not far above the 0.20% fee typically charged by pure global passive portfolios. As institutional pricing becomes more widely available, we can expect costs to fall further, even within actively managed solutions.

This trend offers investors a significant opportunity: you no longer have to settle for "average" returns at low cost.

Instead, you can access above-average potential through well-constructed blends — combining passive efficiency with targeted active insights.

Of course, achieving this requires expertise.

Researching and selecting active managers can be time-consuming and complex. However, this burden doesn’t have to fall on individual investors. It can be outsourced to professional investment houses that specialise in building cost-effective, blended portfolios designed to deliver the best possible outcomes.

In short, the investing landscape is evolving — offering greater choice, better structures, and the ability to aim higher without sacrificing efficiency.

Conclusion: A Shift, Not a Stampede

Vinyl records were declared dead... but they made a comeback.

The same could be said for active management.

Despite years of being overshadowed by passive strategies, active investing still holds an important role — particularly when thoughtful research, selective opportunities, and a shifting market environment align.

As we move into a more normalised world of higher interest rates, greater volatility, and selective growth, revisiting the role of active funds could offer a valuable edge for investors willing to look beyond the average.