Staying Active
Staying Active
Active management faces tough competition from passive funds, but market shifts and diversification create new opportunities. We make the case for our multi-manager approach, blending active investment styles to build resilience and aim for out-performance, in an article published in the 2026 Investment Trust Handbook.
Reasons for concern
"In the long run we are all dead,” said the economist and philosopher John Maynard Keynes. Writing in 1923, the great man was criticising complacency among classical economists who believed that, if you waited long enough, output and employment would always right themselves during an economic crisis.
It took the Great Depression for governments to wake up and intervene. Today, investors in active equity funds could be forgiven for feeling just as frustrated as Keynes was then. “How long do we have to wait until active managers justify their fees by delivering on their implicit promise to outperform industry benchmarks? Never mind the long run, how about in my lifetime?”
There is little doubt that many active managers are testing investors’ patience. AJ Bell’s ‘Manager versus Machine’ report revealed that only about one third of active equity managers outperformed their passive counterparts in 2024. The same is true over a ten-year horizon. The proportion outperforming in the global sector was even lower at only 17–18% in 2024. No wonder so many investors are abandoning active products and flocking instead to cheaper passive rivals.
UK retail investors have withdrawn over £100 billion in the last three years, according to AJ Bell, in favour of trackers, exchange-traded funds (ETFs), bitcoin, mortgages and cash. There’s no clear evidence of a recovery in demand for active funds among retail investors. Interactive Investor’s Top 50 Fund Index for the second quarter of 2025, which ranks the most-popular funds, investment trusts and ETFs, based on the number of purchases made by ii customers, included a majority of 30 tracker products. Morningstar predicts that European passive assets will surpass active equity funds within the next five years.1
The main drag on the performance of active managers in the North American and global sectors has been the concentration of returns in US mega-cap technology stocks, which form a large part of the indices. As at 31 July, the ten largest stocks by market capitalisation in the S&P 500 index accounted for 38% of its value and 24% of the MSCI All Country World Index.2 Most recently, these stocks have benefitted from the explosive growth of (and investor enthusiasm for) artificial intelligence (AI).3
This has massively increased their market capitalisations, which now dwarf the whole stock markets of many countries. Before that, many of them benefitted from Covid lockdowns and remote working. The sheer size of these mega-cap stocks has made life very difficult for active managers who now need extremely large, high-risk positions just to keep pace with the index, let alone to outperform it.
The ten-year performance of Alliance Witan
Source: ShareScope, as at 30 September 2025. Past performance does not predict future returns.
History suggests caution
Given the expectation that AI will increasingly become embedded in almost every industry, it is tempting to conclude these tech giants can go on outperforming forever. Yet, while it is unwise to place blind faith in mean reversion, history suggests that such narrowness rarely persists. With some exceptions, the biggest companies by market capitalisation at the end of one decade are not usually the same as the next.
Furthermore, periods of transition away from concentrated markets have historically created more favourable conditions for active managers. Take the 1996–2000 period, another time of narrow leadership in equity markets. Active managers struggled. But when the dot-com bubble burst, the tables turned. Over the next decade, the median global active manager delivered cumulative outperformance of 28%.4
The need for managing market concentration risk and the likelihood of a more positive future environment provide greater credence to the case for active management. However, just switching more of your money into actively managed funds is not enough. It is important for investors to think carefully about how to build robust diversified portfolios to maximise their chance of success.
Alliance Witan's approach
We see significant merit in carefully blending different investment styles. The Alliance Witan approach, which is unique in the investment trust world, involves choosing 11 highly skilled and specialist active managers to pick stocks for our portfolio. Each manager contributes up to a maximum of 20 of their best ideas from their specialist universe, looking for high potential returns, but balanced between different styles to ensure diversification of risks.
It’s certainly been a challenging period for active managers since the strategy was launched in 2017, one in which share prices have been driven more by macroeconomic and geopolitical news flow – Covid, wars in Europe and the Middle East, Trump and on-off tariffs – than corporate fundamentals. But there are reassuring signs that we may be entering a better environment for active managers. With artificially low interest rates no longer propping up weak companies and markets becoming more fragmented as we move towards a new regime of ‘de-globalisation’, investors are being more discriminating about what they buy and sell.
Recent trends show that equal-weighted benchmarks of US stocks have started to outperform market-cap weighted benchmarks, indicating that more stocks than just the tech giants are beating the index. And as doubts about US stability grow, stocks outside the US have also started to shine. From January 1, 2025, through to the end of July, MSCI China and MSCI UK were the strongest performing markets, measured in sterling, and mid cap outperformed large cap, while growth and value styles delivered similar returns.5
This broader participation by companies across different geographies with less demanding valuations increases the opportunity for active managers to outperform. Additionally, correlations between stocks have fallen and price dispersion – the differences in stock returns between best and worst performers – has been rising after a period of low dispersion. Both lower correlation and higher dispersion enhance the potential for active managers to generate differentiated returns from the index from stock selection.
After such a long period in the doldrums, the comeback by active managers is still in its early stages. But there does seem to be a tailwind developing. AJ Bell’s ‘Man versus Machine’ report for the first half of 2025 showed that a record 51% of actively managed funds in the Investment Association (IA) global sector outperformed a passive alternative in the first half of 2025. It was the first time since the report was launched in 2021 that global active funds had approached anywhere near a 50%- win rate versus their passive peers over any time period.
It’s worth highlighting that active and passive strategies are not mutually exclusive. Indeed, it’s quite sensible to deploy both, depending on the asset class, sector and region that you are investing in, and at different times, as history shows active and passive styles both have their own performance cycles. Passive strategies may have worked much better than active ones in recent years, but the trillions flowing into market cap–weighted products have increased the co-movement of stocks within an index, which reduces diversification. It also undermines so-called price discovery, the process by which buyers and sellers interact in the marketplace to determine the current price of a stock.
The choices today
With prices divorced from fundamentals in some cases and driven by noneconomic flows, reality will eventually bite. Ultimately, it is earnings that determine share prices, not sentiment and flows. Active strategies, like that of Alliance Witan, which steadfastly focus on healthy corporate fundamentals should do well in rational markets.
Alliance Witan has the added advantage of the investment trust structure, which enables us to gear the portfolio up or down depending on the market environment to enhance or protect returns. It means the board can also use the company’s extensive distributable reserves to keep increasing the annual dividend if portfolio income is insufficient, a track record that now stretches to a joint industry-leading 58 consecutive years. And, being a global multi-manager portfolio, Alliance Witan has the flexibility to rebalance exposures between managers depending on market conditions or performance. This is all for a competitive fee of less than 0.6% (60 basis points) per annum.
As a pioneering investor himself, Keynes saw that equity markets can be driven by speculative manias for long periods of time, with each participant second-guessing the next one about what prices should be rather than using research to uncover reasonable estimates of true value. In such a “beauty contest”, he warned “markets can remain irrational longer than you can remain solvent”.
Keynes stayed solvent by buying undervalued companies with solid intrinsic values and holding them for the long term. His fundamental-based investment philosophy and process served him well. Born into an academic family, he died in 1946 with a net estimated worth of between $22m and $30m in today’s money.6
1 ‘Manager vs Machine’, AJ Bell, Dec 2024.
2 These ten stocks are: Nvidia, Microsoft, Apple, Amazon, Meta, Broadcom, Alphabet A, Alphabet C, Berkshire Hathaway, and Tesla.
3 Interactive Investor’s Top 50 Fund Index, second quarter, 2025
4 WTW, August 2025
5 MSCI, August 2025
6 The Financial Times, 7 May 2021
Towers Watson Investment Management Limited (TWIM) has approved this communication for issue to private investors in the UK only. Past performance does not predict of future returns.
Issued by Towers Watson Investment Management Limited (TWIM), registered office Watson House, London Road, Reigate, Surrey RH2 9PQ. TWIM is authorised and regulated by the Financial Conduct Authority, firm reference number 44674. TWIM is the Alternative Investment Fund Manager (AIFM) for Alliance Witan PLC. TWIM is part of Willis Towers Watson.
Alliance Witan PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office, River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Witan PLC gives no financial or investment advice. © Copyright Alliance Witan PLC. Tel: 01382 938 320.
This information is for informational purposes only and should not be considered investment advice. The views expressed are the opinion of TWIM and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as of end November 2025 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable but not guaranteed.