Key Takeaways
- The percentage of UK fund managers beating the index collapsed over the past year.
- A typical active UK large-cap fund may own 40-80 stocks, but the UK Index saw strong gains among its largest constituents.
- Growth stocks, often favored by UK fund managers, underperformed amid a stark value rotation.
Morningstar’s latest Active/Passive Barometer has revealed a dramatic shift in the balance of power among UK funds, and it’s bad news for investors in actively managed UK stock funds. The one-year “success rate” for active managers in the UK large-cap equity category collapsed in the 12 months to June 2026, going from 47.0% to 15.6%, according to the report. This means the number of active funds that survived and beat peers over a year dropped from roughly half to less than one in five.
Over the longer term, the figures are not much better for the 80 funds in the Morningstar UK large-cap category. The success rate is 18.6% over the last three years, 13.5% over the last five, and 11.3% over the last 10.
There are many factors behind this underperformance: index concentration, style and size, and a selloff in the quality growth stocks widely held by fund managers.
The UK’s Largest Companies Outperformed
The main reason for the performance gap was the concentrated nature of the UK Index, which benefited disproportionately from strong gains among a handful of heavyweight constituents, particularly in the financial, energy, and industrial sectors. Major banks continued to benefit from a supportive interest rate environment and favorable capital positions. Energy companies received a boost from elevated commodity prices amid geopolitical tensions in several producing regions. Internationally exposed industrial names maintained strong earnings momentum, supported by resilient global demand and infrastructure spending trends. This led to a concentration of returns among some of the largest companies.
Diversification also contributed to underperformance. A typical active UK large-cap fund may own 40-80 stocks, compared with the category index’s concentration in its largest constituents. While this broader exposure reduces company-specific risk, it can dilute the impact of winning positions when market leadership is narrow.
This table shows the current positioning of a cohort of 80 actively managed UK large-cap funds using their most recent portfolio weightings. Despite many of the largest stocks being widely held, the proportion of funds overweighting them is small. Here, the average active weights are all negative. When a manager has an active weight in a stock, the fund’s exposure is higher than the index’s, and this difference is measured in percentage points.
UK Quality and Growth Stocks Fell Behind
Style exposure also played a significant role. Growth stocks underperformed amid a stark value rotation. Many UK large-cap funds have historically favored high-quality businesses with strong balance sheets, predictable cash flows, and attractive long-term growth characteristics. While these traits have traditionally delivered attractive risk-adjusted returns, they were less rewarded during the 12 months to June 2026.
Quality-growth strategies underperformed, while value-oriented sectors such as energy, banks, and other cyclical businesses benefited from the macroeconomic backdrop. The value/growth style divergence is visible in the data for actively managed funds.
What is starker is the effect of quality. Funds with the largest quality exposures notably underperformed, and most had a tougher time than the category index. Much of quality’s underperformance related to a small subset of stocks—namely, those perceived as artificial intelligence losers.
The AI Selloff Crushed Popular Stocks
A handful of quality companies related were caught up in the AI-related selloff in late 2025 and early 2026. This impacted companies such as London Stock Exchange LSEG and RELX REL. These are among the worst performers over the 12 months to June 2026.
As these are widely held, many managers have leaned into the pain and/or maintained positions, primarily viewing data-related assets as not being undermined by the AI narrative. Again, using a cohort of 80 actively managed UK large-cap funds, one can see how popular these companies are.
For example, RELX is held by 75% of UK large-cap funds, with over 50% overweighting the company. While the average active weight there is 0.2 percentage points, this disguises the fact that some funds hold much more substantial positions.
Stock Size and Sectors Work Against Active Managers
Many active fund managers seek to differentiate themselves by investing beyond mega-cap companies. This typically involves allocating capital to medium-sized businesses or lesser-known large-cap stocks, where managers believe valuation inefficiencies are greater. The share prices of smaller companies have not kept up with large caps.
Sector allocation was another important contributor to relative underperformance. Several active funds entered 2026 underweight energy and materials, reflecting concerns about commodity price volatility and long-term sustainability. Others maintained only modest exposure to large banking groups due to concerns around economic growth, loan demand, and diversification preferences. These positions proved costly when these sectors outperformed.
Meanwhile, sectors frequently favored by active managers—including certain consumer, technology, and professional services stocks—did not deliver comparable returns. As a result, stock selection was often overwhelmed by unfavorable sector positioning.
Below are the returns and average weighting for sectors in the Morningstar UK TME Index for the 12 months to June 2026.
Fund Trends Could Reverse
This underperformance does not necessarily imply a failure of active management. Still, the sharp decline in success ratios reflects a market environment dominated by a narrow group of benchmark heavyweights, strong value-style leadership, and significant sector concentration.
Several factors that hurt active funds could reverse over time. Falling interest rates, improving domestic economic conditions, and a recovery in mid-cap and quality-growth stocks could provide a more supportive backdrop for active managers. We’ve previously highlighted attractive valuations in UK equities, particularly outside the largest index constituents.
For now, however, the last 12 months serve as another reminder that when market performance is driven by a small number of dominant stocks, beating the category index can be exceptionally difficult. Active managers may still add value over a full market cycle, but the benchmark’s concentration proved a formidable obstacle.
