Do active funds beat the market during volatility? 2025's evidence suggests not

Like a geyser's unpredictable eruption, market volatility can create sudden, powerful forces that catch even experienced observers off guard.

The first half of 2025 delivered exactly the kind of market environment that active fund managers have long claimed plays to their strengths: high volatility, policy-driven dislocations, and the breakdown of established market leadership. With Donald Trump's return to the presidency triggering massive shifts in currency markets, sectoral rotations, and bond market turbulence, this should have been active management's moment to shine.

Yet the latest data from Morningstar's European Active/Passive Barometer tells a familiar story. Despite unprecedented market volatility, active equity managers achieved just a 29% success rate over one year virtually unchanged from the 28.8% recorded at the end of 2024. More damning still, the ten-year success rate for active equity managers hit just 13.5% in June 2025, one of the lowest levels of the past decade.

So what's really happening here? Are we witnessing the beginning of active management's vindication, or simply another chapter in the long-running story of expensive underperformance?

The Trump effect: policy chaos creates opportunity

The policy landscape of Trump's second presidency has undeniably created the kind of environment active managers dream about. The US Dollar Index fell 10.7% in the first half of 2025 as investors fled US assets amid concerns over trade tariffs and fiscal expansion. Eurozone equities surged on reallocated capital flows. China's DeepSeek AI breakthrough decimated tech valuations overnight. These are precisely the kinds of rapid, fundamental shifts that should allow skilled active managers to demonstrate their value.

And there are signs that some did. The Morningstar data reveals intriguing variations beneath the headline figures. In the UK Large-Cap Equity category, active managers achieved a 46.5% success rate significantly higher than most other developed market categories. Norway equity managers hit 51.9%, whilst Switzerland showed a respectable 48.6%. Even more striking, Global Government Bond managers posted a 69.8% success rate, up dramatically from 52% a year earlier, as they exploited currency and relative value opportunities in the wake of dollar weakness.

The narrative becomes more compelling when we examine the timing. Active equity managers' success rate plummeted to just 23.1% in February 2025 immediately after Trump's inauguration before recovering toward year-end levels. This suggests that whilst the initial policy shock caught many managers off-guard, those who adapted quickly may have found genuine opportunities in the subsequent market dislocations.

Fixed income: the bright spot for active management

If there's one area where active managers can claim genuine vindication in 2025, it's fixed income. The weighted average success rate across 21 fixed income categories stood at 50.1% in June a far cry from equity managers' 29% but still representing a meaningful chance of outperformance.

This performance becomes more impressive when viewed in context. The post-pandemic environment has created exactly the conditions where active bond managers should thrive: heightened monetary policy activity, volatile yield curves, and complex interactions between fiscal policy and central bank actions. The ability to manage duration, exploit yield curve positioning, and navigate currency exposures has proved valuable in an environment where Trump's fiscal expansion plans and trade policies have created sustained bond market volatility.

The success rates tell the story: EUR Corporate Bond managers achieved 46.7% success, whilst USD Corporate Bond managers hit an impressive 77.1%. Global Government Bond managers' 69.8% success rate reflects their ability to profit from the dollar's weakness and shifting monetary policy expectations across regions.

But even here, the fee drag eventually tells. Over ten years, fixed income active managers' success rate falls to 29% still one of the highest levels recorded in the past decade, but a sobering reminder that fees compound relentlessly over time.

Active funds and volatility: 25 years of evidence

The idea that market volatility creates opportunities for active managers is intuitively appealing and frequently cited by the industry. But a comprehensive analysis of 25 years of academic research paints a remarkably consistent picture: volatile markets do not systematically favour active management.

The foundational research: SPIVA and the efficiency debate

The most comprehensive ongoing study of active versus passive performance comes from S&P Dow Jones Indices' SPIVA (S&P Indices Versus Active) research programme, which has been tracking active fund performance against benchmarks globally for over 20 years. For over 20 years, SPIVA research has measured actively managed funds against their index benchmarks worldwide, providing what many consider the gold standard for active versus passive analysis.

The theoretical foundation for questioning active management's value traces back to Eugene Fama's groundbreaking work on market efficiency. Fama's efficient-markets hypothesis predicts that stock price movements are unpredictable, and that professional managers should not systematically outperform well-diversified passive investments. This framework, developed in the 1960s and refined through the 1970s, established the theoretical basis for expecting passive strategies to outperform active ones after fees.

Comprehensive systematic review: 26 studies across four decades

A systematic review of 499 academic papers from the Semantic Scholar corpus, spanning studies from 1985 to 2021, provides the most comprehensive examination to date of active versus passive performance during volatile periods. The analysis screened for studies that directly compared actively managed mutual funds with passive index funds during periods of market volatility, examining funds with at least three years of performance data across major developed markets.

Of the 26 studies that met rigorous screening criteria, 21 employed longitudinal approaches, 21 used comparative methodologies, and 16 focused specifically on US markets. Crucially, 12 studies explicitly defined volatility in terms of crisis periods, recessions, bear markets, or specific events like the 2008-09 financial crisis and COVID-19 pandemic.

The research methodology was designed to address common biases that might favour active management. SPIVA research separates itself by taking into account survivorship bias and style consistency issues that can tilt performance numbers in active management's favour. Studies included both surviving and liquidated funds, used asset-weighted rather than equal-weighted averages, and ensured like-for-like comparisons between active funds and appropriate benchmarks.

Crisis performance: the consistent pattern of active underperformance

The evidence from major market crises is particularly damning for active management advocates. During the 2008-09 financial crisis, 71.9% of large-cap, 79.1% of mid-cap, and 85.5% of small-cap active funds underperformed their passive benchmarks, with such relatively poor results showing up regardless of short-term market conditions.

This pattern held across multiple crisis periods. Pástor and Vorsatz's 2020 study of the COVID-19 crisis found that most active funds underperformed passive benchmarks even during this period of extreme market dislocation. Chang et al.'s analysis of the 2007-09 crisis concluded that "index funds outperformed active funds in both returns and risk metrics, including during the crisis period."

Perhaps most significantly, Wang and Qiu's 2021 study spanning multiple crisis periods from 2007-2021 found that whilst active funds exhibited "higher performance sensitivity during crises," this did not translate into consistent outperformance. Instead, it often amplified losses during market downturns.

The percentage of active funds underperforming the benchmark increased over longer-term investment horizons, with studies showing 82%, 90%, and 86% of active managers unable to beat their benchmark over three-, five-, and ten-year horizons respectively.

The exceptions that prove the rule

The research does identify specific circumstances where active management has shown superior performance during volatile periods, but these exceptions are narrow and often temporary:

Small-cap specialisation: Allen's 2005 study and Ammann and Steiner's 2008 research found that small-cap active managers were more likely to outperform than their large-cap counterparts. This likely reflects lower market efficiency in small-cap segments where information advantages can be more readily monetised.

High active share strategies: The most influential research challenging the blanket dismissal of active management comes from Cremers and Petajisto's groundbreaking work on "Active Share" a measure representing the percentage of fund holdings that differ from benchmark holdings. Their 2009 study found that funds with the highest Active Share significantly outperformed their benchmarks, both before and after expenses, and exhibited strong performance persistence.

Petajisto's 2013 follow-up study found that the most active stock pickers outperformed their benchmarks by 1.26% annually after fees and expenses, whilst closet indexers predictably underperformed by approximately the amount of their fees. Crucially, these long-term performance patterns held up over the 2008-2009 financial crisis and within market cap styles.

However, subsequent research has cast doubt on the Active Share panacea. A 2016 BlackRock study using out-of-sample data from 2010-2015 found that Active Share was actually negatively correlated with fund returns. Vanguard's 2012 analysis of surviving funds showed that whilst higher Active Share increased return dispersion, it failed to predict outperformance and came with higher costs. Even with survivorship bias favouring the Active Share thesis, higher levels didn't translate to better performance they merely increased risk without compensation. The original Active Share findings may have been a product of their specific time period rather than a reliable predictor of future success.

Sector-specific expertise: Some studies found outperformance in specific sectors during volatile periods. Alqadhib et al. identified that active managers outperformed in technology and industrial sectors during the 2007-09 recession, though this was sector-dependent rather than broad-based.

Down market performance: Sun et al.'s 2009 study found that the most active managers outperformed by 4.5-6.1% annually in down markets, though they failed to maintain this advantage in up markets.

The SPIVA scorecard: two decades of consistent findings

The most comprehensive ongoing analysis comes from S&P Dow Jones Indices' SPIVA scorecards, which have tracked active fund performance across multiple geographies for over two decades. The conclusions, which SPIVA states are 'robust across geographies', include: Most institutional managers underperform most of the time. The tendency for underperformance typically rises as the observation period lengthens. When good performance does occur, it tends not to persist.

Over a 15-year horizon, more than 70% of actively managed funds failed to outperform their comparison index in 38 out of the 39 categories of equity and fixed income funds that SPIVA measures performance for. The pattern is consistent across geographies: Australian, European, and emerging market studies all show similar results.

The fee factor: where outperformance goes to die

The most consistent finding across all 25 years of research is the devastating impact of fees on active management performance. Studies by Pace et al. (2016), Hochachka (2021), and Davis (2016) emphasised that higher fees associated with active management typically negated any potential outperformance.

Shah's 2021 comprehensive analysis using SPIVA data found that "in general, passive funds outperform active funds due to lower management costs". The study noted that fee drag has a particularly significant impact over longer time horizons.

Leippold and Rueegg's 2018 study found that active management was essentially "zero-sum after costs," whilst their 2019 follow-up research showed alpha approximately zero for most fund categories once fees were properly accounted for. Joye et al.'s 2016 analysis was particularly revealing: retail active funds showed no outperformance post-fee, whilst institutional active funds showed only modest abnormal selectivity.

The persistence problem: skill versus luck

Perhaps the most damaging finding for active management is the lack of performance persistence. SPIVA's Persistence Scorecards show that very few active managers can keep outperforming, with true investment skill requiring consistency over multiple periods.

Less than 10% of Australian equity funds in the top quartile remained there over consecutive two-year periods, whilst none of the funds in International Equity, Bond or A-REIT categories maintained top-quartile performance. This pattern is consistent globally.

The fundamental challenge is distinguishing skill from luck. For any exchange of fees charged for fund manager skill to be justified, outperformance must be the result of that skill rather than luck, and if it is the result of skill, then that outperformance should persist over time.

Risk-adjusted reality: the alpha mirage

When academic studies employ proper risk-adjusted metrics Sharpe ratios, multi-factor alpha estimates, and benchmark-adjusted returns the case for active management becomes even weaker. Šindelář's 2022 study found that whilst active funds may offer lower volatility, their risk-adjusted returns were not significantly different from passive funds.

Multiple studies confirmed that apparent outperformance often disappeared once risk adjustments were properly applied. Buehlmaier and Wong's 2020 global study found that whilst certain active strategies (like minimum variance) could outperform in raw terms, the risk-adjusted benefits were often marginal.

Global evidence: the pattern holds worldwide

The academic findings aren't limited to US markets. Studies across Europe, Asia, and emerging markets show remarkably consistent patterns. Cremers and colleagues' 2016 international study examining the relation between indexing and active management worldwide found that explicit indexing improves competition in the mutual fund industry.

Ojanperä's 2011 study of European equity funds found that approximately two-thirds of active managers underperformed, with the pattern being "more pronounced on a risk-adjusted basis." Ammann and Steiner's 2008 analysis of Swiss equity funds found active management underperformed passive strategies by 1.1% annually.

The efficiency foundation: why volatility doesn't help

The theoretical foundation for these empirical findings lies in market efficiency theory. Fama's investment theory suggests that whilst an investor might get lucky and achieve huge short-term profits, over the long term they cannot realistically hope to achieve returns substantially higher than the market average.

The main prediction of the efficient-markets hypothesis is that stock price movements are unpredictable an informationally efficient market is not supposed to be clairvoyant. This explains why even periods of extreme volatility don't systematically favour active management: if price movements are truly unpredictable, then volatility simply represents unpredictable price movements happening more frequently, not exploitable opportunities.

Recent challenges to the consensus

Whilst the overall evidence strongly favours passive management, recent academic work has begun to challenge some aspects of the traditional consensus. Cremers, Fulkerson, and Riley's 2019 review of 20 years of literature since Carhart's landmark 1997 study suggests that "the conventional wisdom is too negative on the value of active management".

This more nuanced view acknowledges that whilst the average active manager underperforms, certain types of active management particularly those with high active share, concentrated portfolios, and genuine stock-picking conviction may add value for investors willing to accept higher risk and pay for genuine skill.

The verdict: 25 years of consistent evidence

The academic literature provides overwhelming evidence that market volatility does not systematically favour active management. Over 20 years of SPIVA data shows that a vast majority of active fund managers wound up as laggards when compared to their respective indexes, regardless of short-term market conditions.

The conclusions are robust across geographies: most institutional managers underperform most of the time, the tendency for underperformance typically rises as the observation period lengthens, and when good performance does occur, it tends not to persist.

The few exceptions highly active small-cap managers, certain crisis-period specialists, some emerging market funds represent narrow niches rather than broad validation of active management. Moreover, these exceptions rarely persist over longer time horizons, suggesting they may reflect temporary market inefficiencies rather than sustainable skill advantages.

This body of evidence provides crucial context for interpreting the 2025 results. Whilst some active managers have indeed exploited the policy-driven volatility of Trump's second presidency, the academic literature suggests investors should be cautious about viewing this as evidence of a fundamental shift in the active versus passive equation.

Small caps and emerging markets: the last active refuges

If there's a genuine case for active management in 2025, it lies in the market segments where passive strategies face structural disadvantages. Small-cap markets, where index concentration issues are less severe and information inefficiencies more common, continue to offer better odds for active managers. Europe Small-Cap equity managers achieved a 34.3% success rate over 10 years still a minority, but meaningfully higher than large-cap categories.

Emerging markets present a similar opportunity. Global Emerging Markets equity managers have consistently achieved 20-25% success rates over 10 years again, a minority outcome, but one that suggests genuine skill differentiation in less efficient markets.

The academic evidence supports this pattern. Studies consistently find that active management is most likely to succeed in small-cap segments and less efficient markets where information advantages can be more readily monetised.

Investment implications: a more nuanced approach

The 2025 experience suggests that investors need a more sophisticated framework for thinking about active versus passive management. The blanket rejection of all active strategies may be as misguided as the blanket embrace of them.

Where active management may add value:

• Fixed income, where duration management, credit selection, and currency positioning can generate meaningful outperformance

• Frontier markets, where local knowledge and information advantages matter

• Specific sectors experiencing policy-driven disruption

Where passive strategies dominate:

• Large-cap developed market equities, where market efficiency makes consistent outperformance nearly impossible

• Core portfolio allocations, where cost minimisation should take precedence

• Long-term wealth accumulation, where fee drag compounds devastatingly over time

The bottom line: active management's expensive gamble

The 2025 market environment has provided active managers with exactly the conditions they claim favour their approach: policy uncertainty, currency volatility, sectoral rotations, and the breakdown of momentum trends. Yet the results remain disappointingly familiar.

A 29% success rate for equity managers means that investors face 71% odds of underperformance poor odds made worse by higher fees. Even in fixed income, where active managers perform best, investors still face coin-flip odds of success.

The harsh reality is that 2025 has not fundamentally altered the active versus passive equation. Whilst exceptional managers in specific niches continue to add value, the broad active management industry remains unable to justify its fees through superior performance.

The proliferation of policy-driven market volatility has created opportunities, but only for the skilled minority who can successfully exploit them.

For most investors, the evidence remains clear: passive strategies offer the best risk-adjusted returns after fees, with active management reserved for specific allocations where genuine advantages can be demonstrated. The Trump-era market volatility may have created headlines, but it hasn't rewritten the fundamental mathematics of fund management.

The active management industry's search for vindication continues. Based on 2025's evidence, that search may be eternal.

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