Authored by: Francois van der Merwe: Head of Global Solutions at Sanlam Investments Multi-Manager
At the close of 2023, a significant milestone was reached in global asset management: passive equity funds surpassed active equity funds in total net assets under management. According to LSEG Lipper, passive equity strategies held approximately US$15.1 trillion globally as of 31 December 2023, compared to US$14.3 trillion in active equity funds. This marked the first time passive equity overtook active on a global scale.
The evolution of passive dominance
This shift has taken a long time. After the 2008 Global Financial Crisis, passive strategies began to gain traction, driven by their cost efficiency, transparency, and accessibility. While active equity funds attracted modest inflows during the early recovery period, passive flows began to consistently outpace active flows from 2014 onwards. Between the beginning of 2016 and October 2024, passive global equity index funds attracted net inflows of approximately US$3.0 trillion, while active funds experienced net redemptions of around US$3.4 trillion, according to the Investment Company Institute.
The dominance of passive strategies peaked between 2021 and 2024. In the first half of 2025, passive equity funds continued to attract strong inflows. However, there were signs of renewed interest in active ETFs – particularly in global and US equity mandates. Research by Sanlam Investments Multi-Manager – using eVestment data on long-only global equity strategies denominated in US dollars – confirmed that active funds experienced net outflows over the past five years. Interestingly, passive funds also faced pressure over the last three years, largely due to asset reallocation from traditional passive strategies to ESG-screened enhanced index products. These enhanced strategies have grown substantially, reflecting investor demand for sustainability-orientated tilts.
Fund growth over a one- to five-year period
Source: eVestment – data until 31 March 2025. Cumulative returns, unannualised.
The value of active management
While passive investing offers clear advantages, it is not inherently superior. Its effectiveness is contingent on market structure, index composition, and prevailing economic conditions. Active management remains essential, particularly in environments where alpha opportunities are more prevalent. Despite recent headwinds, many active managers continue to thrive, growing assets under management significantly over the past five years. This growth reflects not only performance but also investor trust in high-conviction, differentiated strategies.
“Quality” investing – characterised by high return on equity, stable earnings, and low leverage – is a domain where active managers excel. These managers go beyond index replication, identifying future leaders and intangible value with discipline and insight. Notable beneficiaries of strong flows into global equity strategies include Sanders Capital, J.P. Morgan Investment Management, GQG Partners, T. Rowe Price, Ninety One, and Brown Advisory.
A comparison of active and passive strategy performance
Performance comparisons between active and passive strategies often yield mixed results, partly due to differences between retail and institutional fund structures. Morningstar’s Midyear 2025 Active/Passive Barometer Report provides a nuanced view by comparing active funds with a composite of investable passive funds, net of fees. It also evaluates the average dollar invested in active versus passive strategies.
Over the past decade, active funds have shown the highest success rates relative to their passive counterparts in fixed interest credit, global real estate and non-US equity sectors. Importantly, lower-cost active managers consistently outperformed their higher-cost counterparts across most sectors, highlighting the importance of fees. Recent data shows year-on-year improvements in active success rates for US Growth equity, European equities, and fixed interest sectors from 2023 to 2024. Although Value equity sectors saw a decline, they still outperformed the Growth sectors. The weakest performance was observed in the Global Large Blend and Diversified Emerging Market Equity sectors. Investors have been discerning: over the past 10 years, the average asset-weighted active return exceeded the average equal-weighted active return across almost all large-cap categories and periods, indicating a preference for cost-effective, high-quality strategies.
Affiliated Managers Group’s “Boutique Premium Study” (2015, updated in 2018 and 2019) highlighted the long-term outperformance of boutique asset managers across equity styles, particularly during volatile periods. Key differentiators included ownership structure, agility, focused culture, and alignment of interests.
Sanlam Investments Multi-Manager’s analysis of employee ownership in asset management firms – using eVestment data on active global equity composites benchmarked against the MSCI ACWI – revealed that higher employee shareholding correlated with stronger performance across all time periods. Over a 10-year period ending 31 March 2025, the median active manager outperformed the index gross of fees, although they underperformed over shorter periods. The dispersion in one-year excess returns was significant, with a 35% spread between the best and worst performers. Rolling 12-month excess return analysis confirmed that outperformance is cyclical, with the current underperformance phase as severe as that of 2022 and outsized compared to the past.
Source: eVestment – data until 31 March 2025. Excess returns indicated gross of fees. 25% refers to minimum 25% employee shareholding: 50% to minimum 50% employee shareholding etc.
In Global Emerging Markets, active strategies have consistently outperformed the MSCI EM Index over three-year and longer horizons. Structural inefficiencies such as state ownership, inconsistent reporting standards, and limited analyst coverage create fertile ground for alpha generation. Top-quartile active managers in this space have demonstrated consistent outperformance across market cycles.
Active management: a vital component of diversification
Active management tends to outperform in environments characterised by high volatility and dispersion, where stock and sector returns diverge significantly. The ability to raise cash, de-risk, and rotate sectors provides active managers with tactical advantages. They also tend to outperform during macroeconomic inflection points, such as shifts in interest rate regimes or geopolitical events. Conversely, passive strategies often lead during broad, beta-driven rallies with low dispersion – conditions that have been particularly prevalent over the past two years.
Historical patterns suggest that periods of elevated valuations and market concentration often precede downturns. Today’s market leaders evoke comparisons to the Nifty Fifty era, when sustaining high valuations proved challenging. Although the first quarter of 2025 hinted at a recovery in active management in global equity mandates, it was overshadowed by a high-beta, cyclical rally following the Liberation Day market bottom.
In conclusion, while alpha is increasingly elusive and demands exceptional skill and differentiated approaches, active management remains a vital component of diversified portfolios. Strategic patience is warranted, and investors should not overlook the enduring value of active strategies in navigating complexity and capturing opportunities that passive vehicles may miss.
Graviton Financial Partners (Pty) Ltd is an authorised financial services providers in terms of the Financial Advisory and Intermediary Services Act,2002. The information in this article does not constitute financial advice While every effort has been made to ensure the reasonableness and accuracy of the information contained in this article (“the information”), the FSP, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
