The short version
- Before costs, active managers as a group must earn the market return. After costs, they must on average earn less. That's arithmetic, not opinion.
- The FCA found UK active funds beat their benchmarks before charges, but trailed them by around 0.6% a year after charges.
- Only 13.5% of active equity funds sold in Europe survived and beat comparable index funds over the ten years to June 2025.
- Some active funds do beat the market. Picking them in advance is the hard part.
This is the starting guide in Research. Every guide in the series is listed at the end of this page.
- 13.5%of active equity funds sold in Europe survived and beat comparable index funds over 10 years (to June 2025)
- 0.6%a year: how far UK active funds trailed their benchmarks after charges, on average, in the FCA's analysis
Active and passive in one minute
- An active fund has a manager who picks investments, trying to beat a market index. You pay for the research and the trading.
- A passive fund, such as an index ETF, simply holds the index. It aims to match the market, minus a small fee.
The arithmetic
In 1991 the Nobel-winning economist William Sharpe set out a simple argument in “The Arithmetic of Active Management”. Every share in the market is owned by someone. If passive investors hold the market and earn its return, then active investors, taken together, must also earn the market return before costs. They own whatever is left, which is also the market.
After costs, the average active pound must therefore do worse than the average passive pound, because active management costs more. Some active managers will beat the market, but only at the expense of other active managers who fall short.
Before costs, active investors as a group earn the market return. After costs, they must on average earn less.
The arithmetic doesn’t say any particular active fund will lose. It says the average one must, and that the gap is roughly the difference in costs.
What the UK regulator found
The Financial Conduct Authority examined the UK fund industry in its Asset Management Market Study, published in June 2017.
- Active funds sold in the UK beat their benchmarks on average before charges, but trailed them after charges by around 0.6% a year.
- On average, neither active nor passive funds beat their own benchmarks after fees. Passive funds trail by roughly their own small costs.
- It found no clear link between what a fund charged and how well it performed.
- It found little evidence that good performance persists, but some evidence that poor performance does.
The FCA was careful to say it wasn’t telling investors that passive funds are better. Its point was that investors should understand the total cost and what a fund is trying to achieve.
What the long-run scorecards show
Morningstar regularly compares active funds sold in Europe with index funds in the same category. As reported by Money Marketing, only 13.5% of active equity funds both survived and beat their passive peers over the ten years to June 2025, down from 14.9% at the end of 2024.
The “survived” part matters. Many active funds close or merge after poor results, and a scorecard that ignored them would look better than investors’ real experience.
When might active make sense?
Some investors choose active funds for reasons other than beating an index: a particular strategy, an ethical approach, or an income target. That’s a legitimate choice, as long as it’s made knowing the odds and the costs.
If you’re considering an active fund, these questions help:
- What does it cost in total? Compare the ongoing charge with an index fund covering the same market. What does an ETF really cost? explains the charges.
- What is it trying to beat, and has it? Look at performance against its stated benchmark after charges, over five and ten years.
- Would I stick with it through a bad patch? Even good managers have years of falling behind.
The cost of a fund is known in advance. Whether it will beat the market isn’t. The fee calculator shows what a cost gap adds up to over time.
Every guide in Research
This page summarises published research and historical data. It isn't a forecast or advice about what you should do. Investments can fall as well as rise, and you may get back less than you put in. For free, impartial guidance, try MoneyHelper. Read the full disclaimer.
Sources
- William F. Sharpe (1991), "The Arithmetic of Active Management", Financial Analysts Journal 47(1), pages 7–9
- Financial Conduct Authority (June 2017), Asset Management Market Study: Final Report, MS15/2.3, paragraphs 1.7, 1.11 and 6.3
- Money Marketing, "Active managers' success ratio remains steady as US exceptionalism falters", 5 August 2025, reporting Morningstar's European Active/Passive Barometer (data to June 2025)
Facts checked 14 October 2026.