Who is growing tomorrow’s giants?
Peter McGahan
Monday 17th August, 2026.
FOLLOWING the theme of passive investing…. a forest with 10 enormous trees can look magnificent from a helicopter. Walk underneath and find no saplings, poor soil or biodiversity and you have a different picture.
Impressive photograph and a very unhealthy forest.
That is increasingly how I think about parts of the stock market.
The passive argument has been won on cost. Trackers have forced charges down, exposed expensive mediocrity and given ordinary investors access to markets cheaply. Excellent.
But markets do more than provide us with a return. They also have to discover prices, scrutinise companies, allocate capital and decide which small businesses deserve to become large ones.
That work is not passive.
The Investment Association’s figures show the direction of travel. In 2025, tracker funds took in £12.8billion while actively managed funds suffered £15.1billion of outflows. UK equity funds lost another £11.1 billion. This isn’t proof that passive investing is damaging smaller companies, but it is a very large migration of money and attention.
Why does that matter?
A market-capitalisation-weighted tracker naturally directs most money towards the companies which are already largest. A small company outside the main indices doesn’t receive a consolation cheque because its products are clever, its balance sheet is strong, or its shares are cheap.
Someone must notice those things, research them and choose to invest.
The Treasury’s Investment Research Review described research as the “golden thread” running through capital markets. More importantly, it found larger companies are generally well served by analyst’s coverage while smaller companies are not.
Smaller companies attract less investor interest, which makes them less economic for analysts to cover. Less research can then mean less investor interest, less liquidity and, round we go again.
Imagine a promising UK engineering, software or medical company valued at £150million. It needs investors/fund managers who will read the accounts, meet management, understand its competitors and decide whether £150million should really be £100million or £300million.
That disagreement is price discovery.
Without enough people doing that work, prices can become less informative, and liquidity can weaken. Raising fresh capital can then become harder or more expensive. A company may conclude that private ownership is easier, sell itself or perhaps look elsewhere for capital.
The Financial Conduct Authority (FCA) has recognised the underlying issue for years. Its research into passive investing acknowledged the substantial benefits of lower costs, but also pointed out that active management provides research, trading and monitoring which helps an equity market work properly. In 2025 it also changed the rules around paying for investment research, describing good-quality research as crucial to informed investment decisions.
This is where the active manager has an economic role beyond trying to appear above a benchmark in a performance table.
A genuinely active investor/fund manager can say no.
They can refuse an absurd valuation, buy an overlooked business, challenge a board, vote against management and hold a company while an automated index can’t even see it because of what its rulebook requires and in the proportions its index dictates.
That doesn’t make every active manager useful. Far from it. A closet tracker charging active fees is basically the same tree with a more expensive label hanging from it.
The useful active manager is the awkward one. They own companies the benchmark hardly notices. They sell things everyone else loves. They spend money on research. Most painfully, they are prepared to look wrong for a while.
And that creates an uncomfortable “active trap”.
If money continually leaves active funds and moves towards large-cap-weighted trackers, an active manager can identify genuinely undervalued smaller companies and still underperform because the flow of money is travelling in the opposite direction. Underperformance brings more withdrawals, creating more selling and potentially making the valuation gap wider.
Good research can therefore look like bad investing for a while, until it doesn’t.
Markets have always had that wonderful ability to make sensible people look stupid immediately before making everyone else look stupid later.
For UK savers, this isn’t an argument to rescue every active fund manager from extinction. Nature is quite right to remove the weak ones.
It is an argument for understanding that a healthy market needs diversity.
Passive funds can harvest the market efficiently, but somebody still has to cultivate it. Somebody has to investigate outside of the large index, challenge management and move capital towards good businesses before they become obvious enough for an index to care.
Keep the giant trees and make sure we are still growing the next ones.
I will be creating a guide to investing, so, if you would like a complimentary copy, please email info@wwfp.net.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
