Active vs passive funds: why we keep most of a portfolio in index funds
30th October 2026
For most clients, 75% to 80% of a Brigantia portfolio is held in low-cost index funds. We do this because, over the long run, most active funds fail to beat a cheaper index alternative. Morningstar’s latest figures, to June 2026, show that over ten years only 20% of active US equity funds, and 11.9% of active equity funds based in Europe, survived and beat their passive rivals.
The remaining 20% to 25% of our portfolios goes into active funds that each have a specific job, and only where we think they will earn their extra cost.
The remaining 20% to 25% of our portfolios goes into active funds that each have a specific job, and only where we think they will earn their extra cost.
What ten years of data show
Morningstar publishes an Active/Passive Barometer for the US and for Europe, the two largest fund markets. The studies compare active funds with the index funds an investor could have bought instead in the same category, after fund charges, and count funds that closed during the period as failures. The latest editions cover the decade to 30 June 2026, around 9,200 US funds and close to 32,000 funds based in Europe. The table below sets out more detail from the European study, the larger of the two.
Morningstar publishes an Active/Passive Barometer for the US and for Europe, the two largest fund markets. The studies compare active funds with the index funds an investor could have bought instead in the same category, after fund charges, and count funds that closed during the period as failures. The latest editions cover the decade to 30 June 2026, around 9,200 US funds and close to 32,000 funds based in Europe. The table below sets out more detail from the European study, the larger of the two.
| Group | Success rate |
|---|---|
| All active equity funds | 11.9% |
| Global large-cap blend equity funds | 4.0% |
| Cheapest fifth of active equity funds | 18.8% |
| Most expensive fifth of active equity funds | 4.3% |
| All active bond funds | 33.5% |
Source: Morningstar European Active/Passive Barometer, mid-year 2026
The figure for global large-cap blend funds stands out. These are broad global share funds that mix growth and value companies, the kind many investors use as the core of their equity holdings. Over the decade, 4% of them survived and beat the cheaper alternative.
Survival is part of the story. Of the active equity funds that existed in Europe ten years ago, 56.2% are still running, against 67.3% of index funds. A closed fund drops out of the fund lists investors are shown, so any list an adviser shows you is usually made up of survivors.
Picking recent winners does not solve the problem either. S&P Dow Jones Indices tracked the US equity funds that ranked in the top quarter of their category in 2021. Outside small-company funds, none of them stayed in the top quarter in each of the following four years.
Survival is part of the story. Of the active equity funds that existed in Europe ten years ago, 56.2% are still running, against 67.3% of index funds. A closed fund drops out of the fund lists investors are shown, so any list an adviser shows you is usually made up of survivors.
Picking recent winners does not solve the problem either. S&P Dow Jones Indices tracked the US equity funds that ranked in the top quarter of their category in 2021. Outside small-company funds, none of them stayed in the top quarter in each of the following four years.
Why the odds are so poor
Taken together, active investors own the part of the market that index funds do not, so before costs the average actively managed pound earns roughly the market’s return. After charges and dealing costs, it has to trail the average index-fund pound by roughly the difference in what each costs to run. Index funds are far cheaper, so they start every year ahead.
Charges go a long way to explaining the outcome. Among Europe-based active equity funds, those in the cheapest fifth were more than four times as likely to beat their passive rivals over ten years as those in the most expensive fifth.
Where active funds earn a place
The odds vary by asset class. Active bond funds based in Europe beat their passive rivals over ten years 33.5% of the time, nearly three times the success rate of equity funds. Morningstar’s US study, published in August, found similar patterns: active funds did best in bonds, property and emerging market shares, and worst in large US growth companies, where only 5% succeeded over ten years. These are areas where prices are less efficient, trading is expensive, or the index has awkward rules. A standard bond index, for example, gives the biggest weights to the biggest borrowers.
Our active allocation goes into areas like these. Some funds are diversifiers, which means they are chosen to behave differently from the main stock market indices and to hold up when those indices fall. Others are growth funds in markets where the data gives a skilled manager a better chance. Every active fund we hold has to justify its extra cost against the index fund it replaces, and if it stops doing so, we replace it.
What index funds do not solve
An index fund copies its index, weaknesses included. A fund that tracks the S&P 500, the main US share index, now puts a large share of its money into a handful of very large technology companies. Choosing which indices to hold, and how much of each, is where most of the investment decisions in a passive portfolio are made, and it needs as much care as picking active funds ever did.
Why some advisers prefer complicated portfolios
In our view, part of the reason is insecurity. A long list of funds run by star managers makes an adviser look busy and makes the fee easier to justify, while a handful of index funds looks like something a client could have set up alone. An adviser who lacks confidence in the rest of their service leans on fund selection, because it is the most visible part of the job and the hardest for a client to judge.
The work that changes clients’ finances most is planning. For many of our clients that means sorting out tax residency, deciding what to do with UK pensions left behind, planning for inheritance tax, matching currency to future spending, putting the right protection in place and modelling whether the money lasts to age 100. It also means keeping clients invested when markets fall, which is when investors tend to do the most damage to their own returns. Done with the care it needs, that work moves a client’s outcome further than fund selection does.
Taken together, active investors own the part of the market that index funds do not, so before costs the average actively managed pound earns roughly the market’s return. After charges and dealing costs, it has to trail the average index-fund pound by roughly the difference in what each costs to run. Index funds are far cheaper, so they start every year ahead.
Charges go a long way to explaining the outcome. Among Europe-based active equity funds, those in the cheapest fifth were more than four times as likely to beat their passive rivals over ten years as those in the most expensive fifth.
Where active funds earn a place
The odds vary by asset class. Active bond funds based in Europe beat their passive rivals over ten years 33.5% of the time, nearly three times the success rate of equity funds. Morningstar’s US study, published in August, found similar patterns: active funds did best in bonds, property and emerging market shares, and worst in large US growth companies, where only 5% succeeded over ten years. These are areas where prices are less efficient, trading is expensive, or the index has awkward rules. A standard bond index, for example, gives the biggest weights to the biggest borrowers.
Our active allocation goes into areas like these. Some funds are diversifiers, which means they are chosen to behave differently from the main stock market indices and to hold up when those indices fall. Others are growth funds in markets where the data gives a skilled manager a better chance. Every active fund we hold has to justify its extra cost against the index fund it replaces, and if it stops doing so, we replace it.
What index funds do not solve
An index fund copies its index, weaknesses included. A fund that tracks the S&P 500, the main US share index, now puts a large share of its money into a handful of very large technology companies. Choosing which indices to hold, and how much of each, is where most of the investment decisions in a passive portfolio are made, and it needs as much care as picking active funds ever did.
Why some advisers prefer complicated portfolios
In our view, part of the reason is insecurity. A long list of funds run by star managers makes an adviser look busy and makes the fee easier to justify, while a handful of index funds looks like something a client could have set up alone. An adviser who lacks confidence in the rest of their service leans on fund selection, because it is the most visible part of the job and the hardest for a client to judge.
The work that changes clients’ finances most is planning. For many of our clients that means sorting out tax residency, deciding what to do with UK pensions left behind, planning for inheritance tax, matching currency to future spending, putting the right protection in place and modelling whether the money lasts to age 100. It also means keeping clients invested when markets fall, which is when investors tend to do the most damage to their own returns. Done with the care it needs, that work moves a client’s outcome further than fund selection does.
Funds that pay the adviser
The other part of the reason is money. Many funds come in several share classes, which are versions of the same fund with different charges. Some classes carry a higher annual charge so that part of it can be paid to the adviser who recommended the fund. As an illustration, a fund class charging 2% a year might pass 1% of that back to the adviser. The payment is often not shown on a statement as adviser pay, so the client can be told the advice costs them nothing.
The UK banned commission on retail investment advice from 31 December 2012, and later banned fund rebates to investment platforms. Together these moved UK investors into clean share classes with no adviser payment built in. The EU considered going further and, in a deal agreed in December 2025, stopped short of an EU-wide ban. Outside independent advice and discretionary management, where EU rules have banned them since 2018, payments remain allowed if they are disclosed and bring the client what the rules call a tangible benefit. Commission-paying share classes are still sold to investors outside the UK.
An index fund typically pays the adviser nothing, so an adviser paid this way earns nothing for recommending one. Commission-paying classes carry higher charges, which puts them towards the expensive end, where the record in the table above is worst. We are against this practice, and we built Brigantia to give expats an alternative to it, and similar practices.
How to check your own portfolio
Start with the ongoing charges figure on each fund’s factsheet. Equity index funds commonly charge well under 0.3% a year. Check whether the share class you hold pays commission, and whether a cheaper class of the same fund exists. If your funds are held inside an offshore bond, ask for the bond’s own charges too, because they come on top. Then ask your adviser, in writing, how much they receive from each fund you hold, and expect a one-line answer.
Brigantia provides fee-based financial advice for expats around the world. If you would like a second opinion on what you hold and what it costs, you can book an initial call below.
The other part of the reason is money. Many funds come in several share classes, which are versions of the same fund with different charges. Some classes carry a higher annual charge so that part of it can be paid to the adviser who recommended the fund. As an illustration, a fund class charging 2% a year might pass 1% of that back to the adviser. The payment is often not shown on a statement as adviser pay, so the client can be told the advice costs them nothing.
The UK banned commission on retail investment advice from 31 December 2012, and later banned fund rebates to investment platforms. Together these moved UK investors into clean share classes with no adviser payment built in. The EU considered going further and, in a deal agreed in December 2025, stopped short of an EU-wide ban. Outside independent advice and discretionary management, where EU rules have banned them since 2018, payments remain allowed if they are disclosed and bring the client what the rules call a tangible benefit. Commission-paying share classes are still sold to investors outside the UK.
An index fund typically pays the adviser nothing, so an adviser paid this way earns nothing for recommending one. Commission-paying classes carry higher charges, which puts them towards the expensive end, where the record in the table above is worst. We are against this practice, and we built Brigantia to give expats an alternative to it, and similar practices.
How to check your own portfolio
Start with the ongoing charges figure on each fund’s factsheet. Equity index funds commonly charge well under 0.3% a year. Check whether the share class you hold pays commission, and whether a cheaper class of the same fund exists. If your funds are held inside an offshore bond, ask for the bond’s own charges too, because they come on top. Then ask your adviser, in writing, how much they receive from each fund you hold, and expect a one-line answer.
Brigantia provides fee-based financial advice for expats around the world. If you would like a second opinion on what you hold and what it costs, you can book an initial call below.
