The church of active fund management: what fund managers really believe
- Robin Powell
- 2 hours ago
- 8 min read
A new academic study reveals what active fund management really sounds like behind closed doors, and the faith-based arguments practitioners use to justify an industry that most of its own members admit doesn't work.
Anyone who has spent time in a place of worship knows the scene. Soft light. Familiar music. The clergy speaking with quiet conviction about things they plainly believe. At some point the collection plate comes round, and people give. They give because they believe in something larger than themselves, and the giving is part of that belief. Faith is openly named. Everyone knows what the room is for.
A new academic paper describes the same scene, almost exactly. The only difference: nobody is told they're paying for faith. The church, in this case, is active fund management.
The author is Crawford Spence, professor of accounting at King's College London, who spent the best part of a year interviewing 28 senior fund managers in Australia and New Zealand. He asked them how they justify what they do for a living. What he found was less a business strategy than a belief system. Active fund management, in his framing, is a moral community gathered around a sacred idea — alpha, the elusive return above the market — sustained through ritual, story and faith.
The Spence study is unusual in that almost everything in it comes from the active managers themselves, in their own words. They privately admit they overcharge. They concede the average fund underperforms. Many of them quietly run portfolios that are part-passive while charging active fees. A few are openly hoping for a market crash dramatic enough to prove them right. And as institutional clients have wised up, more of them are turning to retail investors. Not because retail investors particularly need active fund management, but because retail investors are less inclined to ask awkward questions about it.
What follows is a tour of the church, with Spence's interviewees as the unintentional guides.
What active fund managers admit when nobody's listening
Some of the most striking moments in the paper arrive when the marketing language drops away and the interviewees start speaking like ordinary people who have looked at the same evidence the rest of us have.
One of the managers, anonymised as AUS 12, puts it like this: 'Fees have come down a long way but we are probably still being over remunerated for what we do.' AUS 4 goes further. 'I do not mind the active management industry shrinking in Australia,' he says, 'because the average fund largely underperforms the index and charges a fee for the pleasure of it.'
The data backs them up. The most recent SPIVA Australia scorecard, which Spence draws on, found that around 56 per cent of active Australian equity funds underperformed their benchmark in 2024. Stretch the window out and the picture darkens. After three to five years, around three quarters had failed to beat the index. After 15 years, the figure was 87 per cent.
The story isn't local. UK investors get treated to almost identical numbers. The latest SPIVA Europe scorecard shows roughly four in five UK Equity General funds have underperformed over 15 years, and the figure climbs higher still for the broader Europe Equity General category. Morningstar's European Active/Passive Barometer tells much the same story, with the 10-year success rate for active equity managers running at around 13.5 per cent, fewer than one in seven.
There is also a separate piece of academic work by Lubos Pastor and Blair Vorsatz, looking at the COVID-19 crash that active managers tend to claim as their moment to shine. Almost three quarters of active US equity funds underperformed the S&P 500 over the ten weeks of the worst of the panic. Whatever the brochures say, the down-market vindication didn't arrive.
What's striking, then, isn't that people inside active fund management don't know any of this. It's that they know all of it. They tell Spence so. The marketing department says one thing and the conscience says another, and the conscience comes out at the kitchen table when somebody finally asks the right question.
Why evidence can't kill a belief system
If everyone privately concedes that active fund management doesn't work, why is it still here? Spence's answer is the analytical core of his paper, and it is not the answer you might expect.
Active fund management, he argues, isn't really a business that has failed to respond to evidence. It is a faith community responding exactly as faith communities do. Alpha, the holy grail of beating the market, is described in the paper as 'deemed sacred here because it has always been built more around belief than logic'. Its appeal, Spence writes, rests on 'supernatural assumptions associated with the promise of future rewards'.
When a community of belief comes under pressure from outside evidence, it doesn't typically dissolve. It develops what Spence calls discursive repertoires, the stories the faithful tell each other to keep the faith alive. He identifies four. There is theological innovation, where managers either double down on more concentrated bets or quietly slip passive holdings into their portfolios while keeping the active label. There is praying for the end times, where they fantasise about a market reset that will finally separate the wheat from the chaff. There is finding new converts, the deliberate pivot to retail investors. And there is ministry outreach, the marketing and governance language used to renew the audience's faith.
The 'dirty beta' admission is perhaps the most quietly devastating. AUS 11 tells Spence: 'Most active managers have a lot of what we call dirty beta. So firms that self-identify as active, a lot of them are just 30 per cent passive really.' AUS 12 concurs, saying 'close to 50 or 60 per cent of the[ir] portfolio will be passive or close to passive'. The active label, in other words, is doing some heavy lifting. The investor is paying active fees on a portfolio that is at least partly running on autopilot.
The high-conviction strategies that have become so fashionable look, in this light, less like a confident new approach and more like apostasy quietly worn as a uniform. As Spence observes, the move into more concentrated, more volatile portfolios is 'a move even further away from evidence-based investing and towards a more hopeful approach'. The response to underperformance, you might say, is not modesty but a louder hymn.
None of this is new ground for Spence. His earlier work with Yuval Millo and James Valentine, published in Economy and Society in 2023, identified the same pattern of 'epistemic opportunism', the strategic snatching at any explanation that puts active fund management in a flattering light, even when the evidence keeps pulling in the opposite direction.
When institutional money leaves, retail investors become the target
Here is where the analogy stops being colourful and starts mattering to the readers of this article.
As pension funds, sovereign wealth funds and other big institutional clients have steadily moved their money to cheaper, broader, evidence-based options, active managers have been quietly turning their attention elsewhere. AUS 23 is unusually frank about it. His firm runs about A$3.5 billion of retail money against A$15 billion of institutional. 'And that is, to be honest,' he says, 'where we make the vast majority of our money because the margins there are much higher … Two thirds of our profit come from less than one third of our firm.'
The maths is the bit that matters. The profitable book is the small one. The captive customer base, you possibly included, is paying for the marketing teams, the office leases and the eschatology.
Why retail? AUS 3 is just as candid. 'So retail is often thought to be very sticky money,' he says, 'and you have to underperform a very long time before that money disappears.' The retail investor, in other words, is valued precisely for the qualities that make her a worse customer for herself. She's slow to leave. She'll forgive years of underperformance she would never tolerate from a plumber.
The fee gap is structural. The FCA's Asset Management Market Study found that UK institutional clients paid an average management fee of around 0.23 per cent, while retail investors paid closer to 0.69 per cent, roughly three times as much for what is often the same product. The same study estimated that about £109 billion was sitting in UK 'active' funds that were really tracking the index. Closet trackers, in the trade. Wholesale prices on the institutional shelf, retail prices on the high street, and many people on the high street don't know there is a wholesale shelf.
The most theatrical strand in active fund management's pivot to retail is the eschatology. AUS 7, drawing on a popular online theory, says: 'Tough times create tough men. Tough men create good times. Good times create weak men and weak men create tough times, and so the view is that we are in the fourth turning and within the next 10–15 years there will be a massive reset and then we will go back to square one.' Spence's gentle observation is that this kind of talk is 'not evidence of a strategy as such because they do not indicate a new game plan so much as a discursive positioning'. There is no plan. There is only a prophecy.
The means by which the prophecy is preached is, almost literally, a tour. Spence describes the investment roadshow as 'the closest equivalent that we get to the revivalist preaching tour that renews group solidarity and emotional energy'. Picture a hotel function room near a railway station. A hundred retired people. A man at the front telling them that the next decade is going to be different.
What to do when faith isn't enough
The Spence paper is not, in the end, an attack on individual fund managers. Many of them are likeable, capable people who came into the industry believing the same things they are now obliged to keep believing in public. The problem with active fund management is structural. The incentives, the narratives and the fee models are all designed to sustain belief, not to deliver results.
The good news is that the alternative is simpler and cheaper than the version on the pulpit. Three small acts of heresy are all it takes.
First, work out how active your active funds really are. If a third or more of the portfolio looks like the index, you may well be paying a premium for nothing. Second, calculate your total annual cost in pounds rather than percentages. A 1 per cent fee on a £400,000 pension is £4,000 a year, and the figure compounds. Third, ask the question Spence's interviewees most hope you never will: what would I have earned in a low-cost global index fund over the same period?
You don't need to predict markets. You don't need to pick stocks. You need to stop paying for someone else's faith.
The collection plate is still circulating
Active fund management survives not because it works but because enough people still believe.
The Spence paper documents an industry whose own members privately admit it overcharges and under-delivers, that quietly runs passive portfolios behind active labels, that targets retail investors precisely because they are slow to question the bill, and that consoles itself with apocalyptic stories about the reset that will finally vindicate the calling. The collection plate keeps circulating because the congregation keeps showing up.
You don't have to be in the pews. You need evidence, low costs and the discipline to tune out the pitch. The exit from this church is unmarked. But it is open.
Resources
Spence, C. (2026). Trading in the end times: keeping faith in financial markets. Journal of Cultural Economy.
Spence, C., Millo, Y., & Valentine, J. J. (2023). Active fund managers and the rise of passive investing: epistemic opportunism in financial markets. Economy and Society, 52(2), 227–249.
Pastor, L., & Vorsatz, B. (2020). Mutual fund performance and flows during the COVID-19 crisis. The Review of Asset Pricing Studies, 10(4), 791–833.
Where to go from here
If reading this has prompted you to wonder whether your own portfolio is paying for someone else's faith, the next step is finding out who is looking after it and on what terms. The TEBI Find an adviser directory lists firms that have publicly committed to evidence-based investing and low-cost, globally diversified portfolios.
If you'd rather start with the bigger picture, the second edition of How to Fund the Life You Want by Robin Powell and Jonathan Hollow is a practical, plain-English guide to the same evidence underpinning this article. It is published by Bloomsbury and available on Amazon.
