Busting a Myth: The Average Active Fund Can’t Beat the Market

The main passive argument claims it’s a mathematical fact. It isn’t.

Simon Evan-Cook
6 min readOct 8, 2022

There are two types of passive investor. One I respect, the other winds me up.

The former has come to the rational conclusion that, because they don’t have the time, experience or interest, they should invest their money in a market tracker. Yes, they’re forgoing the chance to make more than the market, but at least they’re reducing the risk of a costly mistake. So they buy the market tracker, then get back to their lives. This is applaudable self awareness.

The second type has arrived at the same conclusion, but won’t leave it at that. They loudly declare anyone who acts differently to be naïve fools because they don’t understand the “indisputable mathematical fact” behind the passive argument.

The trouble is, it’s not an indisputable mathematical fact. And calling it that is, ironically, a naïve thing to do. So let’s get into that “fact”. Not using my words, but some plucked from the comments section of a national newspaper:

“Investing in any market is a zero-sum game, before costs… This is due to the fact that the aggregate of all investors in a market equates to the index. In less efficient markets, there will be greater variance of managers active returns, but they will still fall short, in aggregate, after management and trading costs.”

The emphasis is mine, just to highlight the subtle switcheroo from “investors” to “managers”.

I’ve seen this argument put more simply as “The average active fund manager can’t beat the market, because in aggregate they are the market, so the average will underperform by the level of charges. So buy a tracker, as it’ll be average anyway, but you’ll pay less for it, so you’ll beat the average active fund”.

Fair summary?

OK. This has lots of flaws, most of which come from translating what is a simple fact into something that actually applies in the messily-complex real world.

First of all, taking it to mean that it’s mathematically impossible for the average fund, or even the average investor, to outperform is wrong. It assumes that funds, or investors, are normally distributed by size.

But this isn’t true: Markets consist not just of the handful of whales that make the headlines, but swarms of plankton too. This wildly uneven distribution matters.

Take an extreme example: In a market of 1,000 investors, if just one of them is so rich as to make up 51% of the market, leaving the other 999 to share out the remaining minority, then, if that one investor messes up, the other 999 will outperform not just the whale, but the entire market. In this case, it’s not just the average investor that’s beaten the market, 99.9% of them have.

The zealots are, in other words, mixing up a simple average (take all investors’ portfolio returns, find the average of those) with a weighted average (take all investors’ portfolio returns, give proportionately more weight to the big investors over the tiddlers, then find the average).

You might argue that this is a technicality, and that it either doesn’t apply — because no one investor makes up 51% of any major market — or that it doesn’t matter — because small investors are likely to be worse investors than the whales.

To the first point, it’s clear that money isn’t evenly distributed in real life, and is becoming even less so. Be they tech billionaire, massive pension scheme or sovereign wealth fund, there are plenty of multi-billion whales out there.

This is true within fund sectors too: take the UK’s collection of global equity funds. There are 380 of them, but over half of the money invested in them is managed by just 23 funds, leaving the other 357 to share out the rest. In fact, half of the funds in that sector — the smallest half — manage just 4.4% of the money. The world of investing is, in other words, no place to be mixing up simple and weighted averages.

This then rubs up against one of my favourite features of investing: Contrary to what you might assume, smaller funds have a massive advantage over the biggest.


It’s incredibly hard to manage a super-tanker portfolio. Largely because the best long-term returns are usually found among smaller companies*. Sometimes because small caps are more inefficiently priced, so can bounce further when they rebound to fair value, or sometimes because a small company can rapidly grow multiple times on its journey to the top of the index, but once they become a megacap, that level of growth is no longer possible.

Super-tanker portfolios can’t take meaningful positions in smaller, or even mid-sized companies, so they end up looking more like the index that they’re supposed to be beating. In their world, there comes a point when, yes, you may as well just buy the index and reduce the handicap from active charges.

But remember, and I hope this won’t come as a shock, you are not a tech billionaire, and you’re almost certainly not running a £100bn+ portfolio. So you can buy smaller companies, and you can look completely different to whatever index you want to beat. So it is entirely possible — likely even — for you to beat that index, provided you don’t do anything stupid (a simple task that isn’t easy).

This is how, despite it being “mathematical impossible”, the average active fund has beaten the market in the UK over the last ten years. Head-burying passive zealots should look away from the following chart:

Source: Morningstar. 16.09.2011 to 15.09.2021.

For those reading in black and white, that’s the IA’s sector average of UK equity funds at the top (a simple average); smashing the index, and therefore the tracker, by the best part of 27% (twenty seven percent) over the last decade.

And yes; that’s after charges. And yes; that accounts for survivor bias by including the returns of funds that have closed in that time. And OK, that sector does include some funds that are benchmarked to the mid-cap index, and mid caps have outperformed. But there are only 14 of them out of the 242 funds in the sector, so while it’s been a help, it’s been nowhere near a 27% help.

Besides; more than cancelling that effect are the sector’s 28 market trackers that have dragged the sector average down by aping an underperforming large-cap heavy index. So you can safely assume that the average active fund has outperformed by more, not less, than the 27% shown above.

This is why the zealots, with their “active management’s a con” motto, annoy me. In the UK, they are doing down an industry that is not just trying to add value for its customers, but actually has. An industry that employs plenty of people in this country, and generates useful tax revenue. But to listen to this lot, you’d think active fund management was a hive of scum and villainy, filled with bandits just looking to take your arm off.

It isn’t.

So how could the average UK equity fund manager pull off this feat of mathematical impossibility?

The UK stock market is, according to Statista, about £4.6tn. The sum total of the active funds within the IA UK All Companies Sector is £108bn. That means they make up 2.4% of the market. So it’s not ridiculous to suggest that a group that makes up just 2.4% of the market could outperform it — particularly if that group has been subjected to intense scrutiny and criticism (and has also lowered their charges, which they have).

This number hints at the complexity of markets. They consist of way more than active fund managers trying to beat that index over your chosen timeframe.

In the UK’s case there are, among others, Global, European and Multi-Asset funds dipping in and out, as well as private investors, brokers, corporate holders, hedge funds and mega-whale sovereign wealth funds — all of which have different aims (income? Low volatility?) and time horizons (Ten years? One year? One second?).

Then consider further complexities from events like mergers and acquisitions, IPOs, buy-backs, rights issues, as well as funds’ cash allocations and off-benchmark holdings.

It is, frankly, breathtakingly naïve to forcefully claim such a simple average can represent so complex a system. But that’s what zealots do, right?

Originally published in Citywire in September 2021.


*But not always. The US over the latter half of the nineties and the last decade is an example of when the largest do win. And as most studies and commentary on funds comes out of the US, it’s lazily assumed it’s been the same everywhere. It hasn’t.

Regardless, whether the market has thrashed the average fund, or vice versa, shouldn’t logically be able to happen if the passivists’ “mathematical fact” argument was true. (An inconvenient truth soon forgotten when the data supports their active-active-is-crap argument).



Simon Evan-Cook

Simon Evan-Cook is an award-winning UK-based fund manager and expert on fund investing.