UK local authority pension schemes rethink active equities after prolonged underperformance
Some UK institutional investors are reconsidering their UK equity exposures in light of continuing underperformance, including funds in the $534bn Local Government Pension Scheme
Against a backdrop of challenging conditions for active UK equity managers, some local government pension schemes are ditching active equity portfolios and reconsidering their UK equity allocations.
Looking at sterling returns to the end of June 2026, AJ Bell found that only 13 per cent of active UK equity funds had outperformed passive indices in UK equities during a five-year period.
In the first half of 2026, just 19 per cent of active UK equity funds outperformed their passive counterparts.
According to AJ Bell's head of markets Dan Coatsworth, active European and UK equity funds "all recorded low levels of outperformance versus their tracker counterparts between January and the end of June 2026".
This dour assessment chimes with S&P Indices versus Active scorecards, semiannual reports published by S&P Dow Jones Indices that compare the performance of active equity and fixed income mutual funds against their benchmarks. The report released in March notes a difficult year for UK equity managers, with widespread underperformance across mid and large-cap equities and UK small-caps.
"2025 was a tough year for active equity managers across the UK market with the vast majority failing to outperform their benchmark indices," says Tim Edwards, global head of index investment strategy at S&P Dow Jones Indices.
Alongside weaker performance, S&P found that returns were driven by a small number of outperforming stocks.
"While there was opportunity for managers to differentiate themselves from the index, much of the gains were dominated by a very small number of stocks, making it difficult for managers to outperform unless they held those specific names," Edwards says.
Asset owners reconsider equities
Some UK institutional investors are reconsidering their UK equity exposures in light of continuing underperformance.
These include the $9bn Surrey Pension Fund, which has decided to sell off its entire UK equity holdings instead reallocating to index-linked gilts along with private markets.
The decision follows weak performance in the Border to Coast Pensions Partnership's UK Equity Alpha Fund.
Over the five years to June 2026, the fund returned 4.79 per cent a year, compared with 10.92 per cent for the FTSE All-Share Index, underperforming its benchmark by 6.12 percentage points a year. The fund's objective is to outperform the index by 2 percentage points a year in rolling five-year periods.
“Active managers might have been caught out by the rotation and didn’t move fast enough, or they were simply parked in the wrong sectors”
Other schemes have also been reassessing their overall equity exposures, including the $18bn Tyne and Wear Pension Fund, which has reduced its equity exposure in favour of income-generating and protective assets.
A review "found that the pension fund is in a strong financial position, which means it can move towards less risky investments", the Tyne and Wear Pension Fund wrote in a newsletter in May.
AJ Bell argues part of the weaker performance reflects last year's winning sectors losing momentum.
While precious metals and mining businesses in the FTSE 350 delivered returns of 251 per cent in 2025, the sector fell 11 per cent in the first six months of 2026.
Aerospace and defence companies, which returned 77 per cent in 2025, gained a more modest 17 per cent during the first half of 2026.
"What worked in 2025 didn't repeat itself entirely in the first half of 2026, with previously strong areas like gold mining, defence, and pharma/biotechnology losing momentum," AJ Bell's Coatsworth writes.
Significant return dispersion across sectors can be particularly punishing for active bets, he explains, adding that "active managers might have been caught out by the rotation and didn't move fast enough, or they were simply parked in the wrong sectors".
In spite of weaker active manager performance overall, some UK-based investors remain sanguine on UK public markets.
In May it emerged the $5bn Oxfordshire Pension Fund was considering altering its UK equity portfolio.
Its fund committee said its partner pool, the $91bn LGPS Central, did not have "an existing portfolio ... that meets the requirements the committee set for an amended UK equity portfolio".
Therefore, there would need to be a process to create such a portfolio and select fund managers.
And in May, Schroder Investment Solutions shifted its focus to more targeted regional equity exposures, including the UK.
This reflected a focus "on markets and fund managers most likely to add value through local knowledge, helped by strong profit trends and attractive valuations", it said.
Waning public markets
The debate over active management is unfolding against a broader structural challenge: the shrinking UK listed market.
In an analysis of UK listings since the Brexit vote in 2016, Saxo, an international investment bank headquartered in Denmark, found "considerable churn" among listed equities. Nearly 40 constituents of the FTSE 100 index had been replaced.
A significant number of take-private deals have contributed to this trend, including Hargreaves Lansdown's $7.2bn acquisition in 2024 by a consortium comprising CVC Capital Partners, Nordic Capital and the Abu Dhabi Investment Authority.
Saxo said businesses moving their listings, known as redomiciling, was "the defining trend" of the past decade, with companies like Tui and Flutter choosing other countries' stock markets for their primary listings.
The ongoing decline of UK public markets, which could see further delistings and take-private deals, is adding to the challenges facing institutional investors as they reconsider their UK equity allocations.
According to Rebecca Maclean, investment director for developed markets at Aberdeen Investments, global buyers are "swooping in to secure those assets before the sale ends", given the backdrop of strong valuations discounts.
She explains: "Public markets may have fallen out of love with dependable compounders, but strategic acquirers continue to recognise the value of businesses with durable competitive advantages, that generate strong cash flows, visible earnings and returns comfortably above their cost of capital."
She called on the government to axe stamp duty to foster strong UK public markets.
"There's plenty to do if we want deeper markets, and more engaged domestic investors, not least financial education," Maclean says.
Her assessment echoes that of John Wyn-Evans, head of market analysis at Rathbones, who has called on prime minister Andy Burnham and chancellor John Healey to improve the investment environment and boost the UK's competitiveness.
This includes championing "incentives for pension saving and [continuing] efforts to channel more pension capital into productive UK investments".