Active management still dominates — and the data proves it
- Robin Powell
- 4 minutes ago
- 6 min read
Active fund managers keep warning that passive investing has grown dangerously dominant. A major new study of institutional investors suggests they're crying wolf, while collecting the vast majority of fees.
Terry Smith is worried. In his latest letter to Fundsmith shareholders, the veteran fund manager warned that the rise of index investing "is laying the foundations of a major investment disaster." It's a claim we've heard before, from Smith and plenty of others in the active management industry.
The timing was awkward. Fundsmith Equity Fund returned 0.8% in 2025. The MSCI World Index delivered 12.8%. Another year of trailing his benchmark.
He's not alone in sounding the alarm. Active managers have spent years telling us that passive funds distort markets, inflate valuations, and undermine price discovery. The financial press dutifully amplifies these warnings. Retail investors hear the message and wonder: have index funds really taken over?
Here's the thing. When you look beneath the surface, beyond the retail fund flows that dominate headlines, a different picture emerges. Institutional investors control the bulk of global capital. Pension funds, endowments, insurers, sovereign wealth funds. The serious money. And according to new research covering $784 billion in assets, these professionals pay 97% of their investment fees to active managers.
The passive "revolution" that supposedly threatens market stability? Among the investors who move markets, it's barely begun.
What the institutional data shows
Callan, a San Francisco-based investment consultancy advising on more than $3 trillion in assets, has released its 2025 Investment Management Fee Study. It's their 11th examination of what institutional investors pay for asset management. The findings should trouble anyone who thinks index funds have conquered the investment world.
The headline numbers are stark. Active management accounts for 61% of institutional assets and 97% of total fees paid. That's down one percentage point from Callan's previous study in 2023. Passive strategies, for all the attention they receive, represent 39% of assets but only 3% of fees.
The study draws on data from roughly 180 institutional investors and 329 investment firms, covering 23 asset classes. Callan is US-based, but the scope is global: mandates in global ex-US equity, emerging markets, emerging debt. A broad picture of what professional investors worldwide pay.
Why does this matter? Because institutional investors are the market. They account for around 85% of trading activity on major exchanges. Retail investors, for all the headlines about meme stocks and trading apps, represent a small slice of market activity. If passive investing were taking over, you'd see it in the institutional data first.
You don't.
The fee gap is revealing. Active mandates carry a weighted average fee of 38.4 basis points. Passive mandates cost 1.6 basis points. More than 20 times the price. Institutional investors aren't stupid. They negotiate hard. They have bargaining power that retail investors can only dream of. Yet they're paying billions to active managers who, in aggregate, can't beat the market.
The slow creep, not the revolution
Passive is gaining ground. But slowly. Much more slowly than the headlines suggest.
US small-cap equity saw the biggest shift. Passive usage jumped six percentage points to 29%. Core fixed income rose two points to 47%. Meaningful moves.
But look closer. US large-cap equity, the segment where passive has made its deepest inroads, saw passive usage tick down three percentage points to 70%. Even in the most indexed corner of the market, nearly a third of assets remain actively managed.
In certain asset classes, active managers have barely felt the pressure. Hedge fund-of-funds command average fees of 113 basis points. Private real assets charge 88 basis points. Callan describes these areas as showing "fee resilience." Translation: the money keeps flowing, and the fees stay high.
The revolution is more of a slow shuffle.
Who benefits from the status quo
Follow the money. It flows to a remarkably small number of firms.
Callan's concentration data is striking. In active management, 34 firms out of 329 capture 50% of all fees paid. That's 11% of the industry taking half the revenue. Passive is even more concentrated. Two firms control more than half of all passive assets, fees, and mandates.
So why don't institutions shift faster toward lower-cost options? Part of the answer is career risk. Pension trustees and endowment committees face an uncomfortable asymmetry. Choose active managers and underperform? You're in good company. Everyone else did the same thing. Choose index funds and underperform, even briefly? You made the unconventional call. You stuck your neck out. That's a harder conversation to have with your board.
There's also the question of what consultants do. Firms that advise institutional investors on manager selection have built businesses around evaluating active managers. Recommending a shift to passive doesn't generate repeat engagements.
And then there's something harder to quantify. Active management feels like work. It feels like proper stewardship. You're paying experts to analyse companies, to make judgments, to do something. Buying an index fund feels passive in more than name. Too simple. Too hands-off. Surely that can't be the answer?
It can. But the incentives don't point that way.
The evidence active managers ignore
Most active managers underperform. This isn't opinion. It's arithmetic.
The SPIVA scorecard, published by S&P Dow Jones Indices, has tracked active fund performance for over two decades. The 2024 results showed 65% of large-cap US equity funds trailing the S&P 500. Worse than the 60% in 2023. Roughly in line with the 64% average since SPIVA began.
Stretch the time horizon and the numbers get bleaker. Over the 15 years ending December 2024, there wasn't a single equity category where the majority of active managers outperformed their benchmark.
Not one.
But maybe some managers have genuine skill? Maybe the trick is finding them early and sticking with them? SPIVA tests this too, through its persistence scorecard. The results are brutal. Not a single top-quartile large-cap fund from 2020 remained in the top quartile by the end of 2024. Zero. The outperformers of one period become the laggards of the next with depressing regularity.
None of this should surprise anyone who understands basic maths. William Sharpe, the Nobel laureate, laid it out in 1991. Before costs, the aggregate return of all active investors must equal the aggregate return of all passive investors. They're buying the same market. After costs, active must underperform on average. Simple arithmetic (Sharpe, 1991).
The 38.4 basis points that institutions pay for active management doesn't disappear. It compounds. Year after year. And for what?
You don't have to follow the institutional herd
Here's the good news. You're not a pension trustee.
You don't answer to a board. You don't have to justify your choices to a committee who'll blame you if something goes wrong. You don't need consultants to validate your decisions. The career risk that keeps institutions anchored to active management? It doesn't apply to you.
Individual investors can act on evidence that professionals ignore. You can look at the SPIVA scorecards, the simple arithmetic of costs, and make a different choice.
So do it. Review your portfolio. Add up what you're paying in fees — not the headline charges but the total cost. Ask yourself honestly: have your active funds earned their keep?
Over five years. Over ten. Against a simple, low-cost alternative.
And the next time a fund manager warns you about the dangers of passive investing, check their performance first. Then decide who's talking their own book.
The bottom line
Terry Smith warns of "a major investment disaster" from passive investing's rise. The data tells a different story.
Institutional investors, the people who control most of the world's capital, direct 97% of their fees to active managers. Six in ten of their assets remain actively managed. The shift everyone talks about? It's barely begun.
When active managers sound the alarm about index funds, remember who's talking. Remember what they're protecting. And remember that the same managers crying wolf have, in aggregate, failed to beat the benchmarks they dismiss as dangerous.
The passive revolution has a long way to run. For individual investors willing to follow the evidence rather than the institutional herd, that's not a threat.
It's an opportunity.
Recently on TEBI
Prefer watching to reading?
Subscribe to our YouTube channel for evidence-based investing insights explained visually. Complex concepts made clear in under 10 minutes. New videos every week — hit subscribe so you never miss one.
