Fund Battle: should you invest actively or passively in the UK?
Over the long term, most active funds struggle to keep pace with funds that simply aim to replicate the return of the stock market. But active funds can deliver when markets are in turmoil, writes Sam Benstead.
6th August 2025 08:38
by Sam Benstead from interactive investor
One of the most important decisions an investor must make when accessing an investment market is to choose an active fund or passive funds (called index funds or exchange-traded funds, or ETFs), or to combine them.
Passive funds simply track an index, such as the FTSE 100 or FTSE All-Share, for a low fee (below 0.1% a year is not uncommon). For example, Fidelity Index UK, which tracks the FTSE All-Share index, is one of our Super 60 investment ideas, and costs just 0.06% a year in fees.
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Meanwhile, active funds employ a professional stock picker to try and find winners in a market, for a much larger fee (typically around 0.85%).
Passive investing continues to rise in popularity. We see this in our monthly most-bought tables, where passive funds such as Vanguard’s LifeStrategy range, or US or global index trackers, dominate the lists.
The Investment Association (IA), the industry trade body, calculates that around 25% of the UK funds industry is now invested passively. A decade ago (at the end of 2015), their overall share of industry funds under management was 12.4%.
But for the UK market, what works best – active or passive?
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One way of finding out is to look at the share of active funds that are ahead of their benchmark index over different time periods. S&P Dow Jones Indices runs the numbers by adjusting for survivorships bias, which is when only the top-performing funds continue to exist, as well as removing passive funds from the data set.
Their research is not encouraging for fans of active funds.
The latest report found that as of the end of 2024, over the past 10 years 82% of UK equity funds had underperformed their benchmark, while 67% of UK Smaller Companies funds underperformed and 87.9% of large UK companies underperformed.
Over five years the percentage of underperforming funds is similar, and over three years it is actually worse, with 90% of UK equity funds underperforming their benchmark, 93.38% underperforming in the UK large-cap space and 85.71% underperforming in the UK small-cap sector.
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Over the past year (to end of December 2024), performance has been better but still not encouraging, with about three-quarters of funds underperforming in the UK Equity and UK Large/Mid-cap space.
Category | Index | Share of underperforming funds: 1-year (%) | 3-year (%) | 5-year (%) | 10-year (%) |
UK Equity | S&P United Kingdom BMI | 72.01 | 90 | 82.2 | 82.02 |
UK Large-/Mid-Cap Equity | S&P United Kingdom LargeMidCap | 75.61 | 93.38 | 89.36 | 87.9 |
UK Small-Cap Equity | S&P United Kingdom SmallCap | 56.94 | 85.71 | 57.69 | 67.09 |
Source: S&P Dow Jones, data to 31 December 2024. Past performance is not a guide to future performance.
S&P Dow Jones Indices also found that for UK equity funds, no funds were top-quartile performers in each of the five calendar years from December 2020 to December 2025, but 7.65% of funds were top-half performers (top 50% of funds) over the same discrete five-year blocks in smaller UK shares.
Returns this year do not appear to be improving for active UK funds. The average performance in the IA’s UK Equity Income, UK All Companies and UK Smaller Companies sectors (which include index funds) so far this year are all behind the returns from the FTSE All-Share index.
The sectors have returned 11.1%, 10% and 4.8% respectively up until 29 July 2025, which is behind the 12.8% return from the FTSE All-Share.
However, active funds have led the way since the UK market rally from 9 April, when market sentiment reversed when Trump announced a 90-day pause on tariffs.
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From 9 April to 29 July, all UK sectors are ahead of the FTSE All-Share, which shows that many active funds have fared well over this strong period for markets.
Topping the charts is the UK Smaller Companies sector, where the average fund returned 22.2%. Second is the UK All Companies sector with an average return of 20.6%. Finally, UK Equity Income funds returned on average 20.5%. This compares with a 20.2% return for the FTSE All-Share.
This shows that many active fund managers were able to take advantage of panicked stock markets and allocate capital to shares that unjustifiably fell.
However, they could also have been more aggressively positioned, meaning they fell further than the wider market when share prices slumped, but rose the most when they rallied.
Active and passive UK funds to consider
There are 12 UK equity funds on our Super 60 list of fund ideas.
The two passive options are Fidelity Index UK, which tracks the FTSE All-Share index for a 0.06% fee; and Vanguard FTSE UK Equity Income Index, which tracks high-yielding UK shares – the yield is 4.5% and the fee is 0.14%.
The active funds our research team like are: Artemis Income, JPM UK Equity Core, Fidelity Special Values, Lindsell Train UK Equity, RGI UK Recovery, City of London investment trust, Man Income Professional, Henderson Smaller Companies, Diverse Income Trust and WS Amati UK Listed Smaller Companies.
Six of 10 active funds are ahead of the Fidelity Index UK tracker over the past five years.
Name | Asset Group | Ongoing Charge | Yield | 1Yr | 3Yr | 5Yr |
UK equities | 0.06% | 3.05% | 11.65% | 36.90% | 70.73% | |
UK equities | 0.66% | 2.19% | 8.22% | 20.80% | 27.69% | |
UK equities | 0.91% | 1.66% | 7.00% | 35.71% | 85.44% | |
UK equity income | 0.14% | 4.49% | 14.04% | 42.59% | 86.63% | |
UK equity income | 0.37% | 4.53% | 16.32% | 40.87% | 93.46% | |
UK equity income | 0.90% | 5.21% | 12.28% | 52.49% | 90.17% | |
UK smaller companies | 0.89% | 1.86% | 5.01% | 9.26% | 1.92% | |
UK smaller companies | 0.45% | 2.91% | 5.54% | 7.41% | 34.60% | |
UK equity income | 1.05% | 4.08% | 24.92% | 26.78% | 62.30% | |
UK equities | 0.70% | 2.57% | 19.76% | 53.82% | 132.20% | |
UK equity income | 0.81% | 3.32% | 17.57% | 49.75% | 89.66% | |
UK equities | 0.32% | 3.07% | 11.94% | 38.48% | 75.03% |
Source: Morningstar/interactive investor, data to 29 July 2025. Past performance is not a guide to future performance.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.