Manager versus Machine: Just 27% of active funds have beaten a passive alternative this year

  • Only 13% of UK active equity funds outperformed a passive alternative in 2022, thanks to higher mid and small cap exposure
  • US active managers have had a relatively good year, with 40% outperforming
  • UK investors in the S&P 500 have been given a get out of jail free card by weaker sterling
  • The most expensive UK tracker fund is 21 times more expensive than the cheapest

AJ Bell’s newly published Manager versus Machine report for 2022 shows that just 27% of active equity funds outperformed a passive alternative this year, down from 34% in 2021. Things look better for active managers over ten years, where 39% have outperformed a passive alternative, down from 56% in our 2021 report.

A full copy of the report is available via this link or on request.

Laith Khalaf, head of investment analysis at AJ Bell, comments:


“2022 has been an annus horribilis for active equity funds, especially those plying their trade in UK shares. In a year when stock markets have faltered, active managers might have expected to nudge ahead of the tracker funds that simply passively follow the index, but our latest Manager versus Machine report shows any such hopes have been dashed.

“One year is too short a time frame over which to make conclusive judgements, as even the best active managers will endure periods of underperformance. But the longer term figures suggest there are certain sectors where active managers have performed better than others, so investors might consider being selective around where they opt for passive exposure, and where they might have better success with an active manager at the helm.

“Where they do select active managers, investors need to tilt the performance odds in their favour, by conducting research to pick out managers with a proven track record of outperformance. That’s no guarantee going forward of course, but if an individual active manager has delivered outperformance over a long period, that suggests they are skilful and not just lucky. That skilful fund managers exist is not incompatible with a large proportion of active funds underperforming a passive alternative.”


Proportion of active funds outperforming the average passive fund

IA Sector2022 YTD5 Years10 Years2021
Asia Pacific Ex Japan12%19%47%26%
Europe Ex UK43%40%51%53%
Global Emerging Markets21%36%44%50%
North America40%17%17%19%
UK All Companies13%27%60%41%

Sources: AJ Bell, Morningstar, total return in GBP to 30th November 2022, 2021 data to 1st Dec 2021

Manager versus Machine report highlights

  • Active managers investing in UK equities have had a real stinker of a year
  • Only 13% of funds in this sector outperformed a passive alternative
  • In the longer term the UK has been a bright spot for active managers, with 60% outperforming over 10 years

“It’s been a real stinker of a year for active funds investing in the UK stock market, with the average active fund returning -8.7% compared to 1.9% from the average passive fund. Even some top quartile active funds in the sector have underperformed a passive alternative. This dismal year for UK active managers is largely explained by a significant divergence of returns within the UK stock market. Active managers are much more heavily exposed to small and medium sized companies than the typical tracker fund, and these areas of the market have sold off heavily. Meanwhile the big beasts of the FTSE 100 have actually made positive returns for investors this year, thanks in part to share price gains in the oil and gas sector. In the longer term, mid and small cap exposure has been a tailwind for active managers, helping 60% of active funds to outperform a passive alternative over ten years.”

UK Index Performance

Total return %
 Year to date10 years
FTSE 1006.388.6
FTSE 250-16.3106.1
FTSE Small Cap-14.0151.8
FTSE All Share1.892.8

Source: FE, total return to 30th Nov 2022

  • US active managers had a relatively good year, thanks in part to the techlash
  • 40% of active managers outperformed a passive alternative in 2022
  • That’s up from 19% in 2021
  • The longer term picture is much bleaker for active managers, with only 17% beating the passive machines
  • UK investors have been given a get out of jail free card by weaker sterling

“This year has seen a techlash damage the share prices of big US technology stocks, which make up such a large part of the S&P 500, and consequently, the passive funds that track it. 40% of active equity funds investing in the US have beaten a passive alternative in 2022. That statistic may not have the ring of resounding triumph, but it compares favourably to 2021 when only 19% of active US funds managed to outperform the passive machines and to the long term picture, which shows that only 17% of active funds have outperformed over a ten year period. Against this backdrop then, it’s been a positive year for active managers investing in the US stock market.

“The S&P 500 fell into bear market territory in 2022, but a little appreciated fact is quite how much UK investors have been insulated from this downdraft by weaker sterling. A falling pound has basically handed UK investors a get out of jail free card, as the world’s biggest stock market has gone into meltdown. The S&P 500 has produced a dollar return of -13.5% in 2022 to date. However, in sterling terms the S&P 500 has returned -1.6%, a significantly better result. UK investors conducting an end of year review of their US holdings might well wonder what all the fuss is about.

“UK fund managers, on the other hand, must be tearing what’s left of their hair out. This is the first year since 2016 when the FTSE All Share has beaten the S&P 500, yet UK managers have still finished way behind their US counterparts. That’s because of their exposure to mid and small caps, and at the same time weaker sterling pushing up the performance of dollar denominated stocks for UK investors. In the year to date, the average UK fund has returned -8.1% and the average US fund has returned -5.6% (based on Investment Association sectors which contain both active and passive strategies).”


Techlash in numbers

2022 YTD Share Price Change %
Alphabet Inc-29.9 Inc-42.1
Apple Inc-16.6
Meta Platforms Inc-64.9
Microsoft Corp-24.1
Netflix Inc-49.3
Tesla Inc-44.7
Average S&P 500 stock-8.1%

Source: Sharepad to 30th Nov 2022

  • The most costly UK tracker fund is 21 times more expensive than the cheapest
  • Passive investors should ensure they hold competitively priced products
  • An investor switching £10,000 from the most expensive to the cheapest UK tracker would be £6,627 better off after 20 years, assuming 7% gross annual growth

“It’s not just active managers who charge a premium over the average tracker fund, some passive funds do too. The range of charges levied on passive funds varies from sector to sector, but there is a pretty egregious premium charged by some funds in the UK All Companies sector, where the cheapest comes with a price tag of 0.05% per annum, and the most expensive annual charge levied is 1.06%. In other words, the most expensive UK tracker fund costs 21 times more than the cheapest. And these ongoing fees are levied year in, year out.


“Unlike with active managers, there can be no attempt to justify higher charges through superior performance potential, seeing as these funds are doing a very similar job of tracking an index. If they do this precisely, the net return delivered to investors will be the index performance, minus charges. To put this in pounds and pence, an investor who switched £10,000 from the most expensive UK tracker fund to the cheapest would be £6,627 better off after 20 years, assuming a 7% gross return from the market. There can be little reason for investors not to make such a rewarding switch.”

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