Will Trump help active management recover its mojo?

Donald Trump’s return to the White House has investors on edge — but does more uncertainty mean it’s time to abandon passive funds in favour of active management?

Whether you like Donald Trump or not, no one can say the start of his second stint as President has been dull. Almost every day, he says something we weren’t expecting, whether it’s threatening to trigger a global trade war, annexe Canada or fire the chair of the Federal Reserve.

From a financial markets perspective, whether he actually follows through on any of these things is not the point. His words alone create uncertainty — something markets notoriously struggle with.

Ironically, investors seemed hopeful until recently that Trump’s return to the White House would be good for stock prices. It now looks likely, at best, that investors need to brace themselves for regular bouts of volatility over the next four years. At worst, a protracted bear market could be looming, particularly if a trade war sparks a global recession.

What does Trump 2.0 mean for investors?

What, then, does Trump’s return to the Oval Office mean for investors? At the time of writing, most markets outside the US are hovering around the level they were at before the President’s “Liberation Day” announcement on 2nd April. But US stocks, which still account for well over half the world’s stock market capitalisation, are still deep in correction territory.

By reducing your US exposure now, you would only be crystallising what, at this stage, are still just paper losses. As Abraham Okusanya, Alex Crowther and Laurentius van den Worm have already explained, history shows us, time and again, that diversified investors who ride out short-term volatility have generally been rewarded in the past.

But based on the first 100 days of Trump’s second term, are investors better off in passive or other systematic, funds, or in funds run by traditional active managers? 

Of course, fund providers keep telling us that active stockpicking and market timing come into their own in times of uncertainty and in bear markets. But is it actually true?

Do active managers perform better in volatile markets?

In theory, periods of market volatility provide a favourable environment for active managers. After all, it’s at such times that mispricings are more likely.

However, the evidence tells us that although some active funds manage to outperform at time of acute market stress, most funds don’t. For example, FE Trustnet has looked at how active funds fared in the recent market turmoil.  Between the market peak on 22 January and 22 April 2025, it found that UK-domiciled active funds underperformed passive in 32 sectors in the Investment Association universe, while they outperformed in just 17.

Active funds in the IA Technology & Technology Innovation sector performed worst of all, losing, on average, 24.6%. That’s almost five percentage points more than the 19.7% fall from the average passive fund. One fund, Liontrust Global Technology, fell 31.6%. The peer group’s seven best performers are all index trackers.

In the three UK equity sectors – IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies – the 90 worst funds are all active.

Of the 20 European equity funds with the biggest losses this year, 18 are actively managed, while 15 of the top 20 European funds are passives. The best performer, SPDR MSCI Europe Utilities UCITS ETF, outperformed the two worst performers — both of them actively managed — by 30.9%.

It was a similar story in 2020 when markets fell sharply as the severity of the COVID-19 pandemic became clear. Lubos Pastor and M. Blair Vorsatz looked at fund performance between 20th February and 30th April that year. In theory, the pandemic presented active managers with rich opportunities. Yet 74% of US-domiciled active equity funds underperformed the S&P 500, and 58% of funds underperformed their style benchmarks. 

The average fund underperformed the S&P 500 by 5.6% during that ten-week period (29% annualised). The average underperformance relative to the style benchmark was 2.1% (11% annualised).

Can active funds protect you in a downturn?

In short, the case for switching to active management in expectation of regular volatility between now and the next Presidential Election seems flimsy at best. But what if the US, or indeed the world, is about to enter a recession? What if we can no longer rely on what Warren Buffett has called the “great American tailwind” to keep driving global stock markets?

Again, the evidence suggests that switching to active funds is unlikely to improve your returns. A 2020 paper by Russ Wermers found that although the average mutual fund does add value before expenses through stock selection during a bear market, net returns are negative after expenses. Crucially, Wermers found very little evidence that active managers are able to time the market successfully.

The most recent analysis of active fund performance in bear markets was conducted by Anu Ganti at S&P Dow Jones Indices. Ganti looked at the 24-year history of the SPIVA US scorecard. Over the period, the S&P 500 produced negative annual returns five times. In all five of those years, most large-cap equity funds lagged the index.

Ganti then compared the performance of active managers in years when markets declined relative to their performance in years when markets rose.

An average of 56% of stocks outperformed the S&P 500 during the five years when the index declined — higher than the 46% that did so during the 19 years of market gains. This outcome is intuitive, as falling markets tend to set a lower bar for outperformance. Yet even in these more favourable conditions, 61% of large-cap funds still lagged the index, which is only slightly better than the 65% underperformance rate during up years and the 64% average over the entire 24-year period.

Index funds remain the logical choice

These studies make one thing clear: active management may offer the possibility of beating the market, but not the probability. You might just happen to pick a fund that outperforms during the rest of Trump’s second term — but the odds are firmly against it.

And even if you do back a winner, then what? Stick with them and hope their style suits the next administration too? Or jump ship again and try to second-guess the next political cycle?

History shows how hard it is to make those calls. If you can’t predict the future — and who can? — your best bet is to stay the course with index funds.

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