Every year, thousands of highly educated fund managers try to beat the stock market, but the truth is that the vast majority fail. Not because they are stupid. Not because they are lazy.
They fail because the maths is stacked against them from the start.
Morningstar’s 2025 European Active/Passive Barometer found that only 10.2% of active UK large-cap equity funds survived and beat their passive peers over 10 years; basically, a 90% fail rate!
The S&P’s SPIVA Europe Year-End 2025 report was just as bad. It found that 89% of active UK large/mid-cap equity funds underperformed their benchmark in 2025. For UK small-cap funds, the figure was 97%.
Why the odds are stacked against them
The reason active fund managers underperform, is because they are not competing against ordinary investors. They are competing against each other.
When one professional fund manager buys a share, another professional investor is often selling it. Both have research. Both have analysts. Both have a view. Both think they are right.
So this is not a clever fund manager versus “the market”. It is effectively a clever fund manager versus clever fund manager; both cannot be right!
Then the fees
A global index fund simply owns the entire market cheaply. An active fund however, has to pay for managers, analysts, research, trading, offices, marketing, and all the other machinery behind the fund.
So the active manager does not just need to beat the market, they need to beat the market after costs… which destroys your long term wealth and compounding.
Nobel Prize winner William Sharpe explained this years ago in The Arithmetic of Active Management. Before costs, the average active investor must equal the market. After costs, the average active investor must lose to the market.
The near impossible task of picking winners
Of course, some active managers do outperform the market, there will always be a few winners - but this is rare. The problem and hardest thing is identifying them in advance.
Everyone can point to the star manager after they have already had a brilliant decade. That is easy. The hard part is picking the next star manager before the outperformance happens.
And even then, you need them to keep winning.
Many do not.
Sources: FCA Woodford Decision Notice, ARK ARKK factsheet, Scottish Mortgage annual report, Smithson annual report, Fundsmith Stewardship factsheet, and Baillie Gifford American Fund data; figures are period-specific and rounded where appropriate.
Why I prefer passive investing
This is why I prefer passive investing for the core of my portfolio.
Not because it is exciting, but because it is beautifully boring and simple.
It does not require me to guess which fund manager will be in the tiny minority that beats the market. It does not require me to pay high fees for the privilege of hoping someone can do what most of their peers fail to do.
It simply lets me own the market, keep costs low, stay diversified, and let time do the heavy lifting. Many years ago I did invest in Neil Woodford’s fund (manager 1 in the image above) and I did lose money. Luckily I got out before it was too late otherwise I would have lost everything.
Active investing sells the dream of beating the market.
Passive investing accepts the maths and compounds quietly at low cost.
If you had to choose, what would you opt for?
The Compounder
Long-term investing made simple.
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Until next time, keep compounding.
The Compounder is for financial education and commentary only. I am not authorised or regulated by the Financial Conduct Authority and I do not provide financial advice, investment advice, or personal recommendations. Nothing published here should be taken as a recommendation to buy, sell, hold or switch any investment, fund, pension, ISA, crypto asset or financial product. Always do your own research and consider speaking to an FCA-authorised financial adviser if you are unsure.