Morningstar said 2025 was a year 'marked by volatility' as European investors shifted from the US to European and emerging-market equities.
Less than a third of actively managed funds had success in beating relevant benchmarks in 2025, according to data from Morningstar.
The research house pointed to market concentration as the main driver of underperformance relative to passive funds in its 2025 European Active/Passive Barometer, as only 31% of active equity managers across 39 equity categories were able to make the grade.
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Morningstar also highlighted fees as another major factor, noting that high fees can make the difference in whether a fund survives a period of underperformance or not.
Active funds with lower fees were therefore more likely to succeed over the long term, the firm noted.
Eugene Gorbatikov, analyst at Morningstar, said: "Irrespective of asset class, a fund's survival is closely tied to its success, with most active funds failing due to their short lifespan caused by underperformance. Higher fees relative to passive funds contribute to weaker net outcomes.
"Our analysis indicates that lower-cost active funds are more likely to succeed over time."
"Active managers are typically more successful in mid- and small-cap equities than large-cap stocks. They also perform better where passive funds show structural bias or concentration in specific sectors or stocks," he added.
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In the report, Morningstar said 2025 was a year "marked by volatility" as European investors shifted from the US to European and emerging-market equities. while there was also a strong move toward passive investments.
Eurozone equity markets showed resilience in the second half of 2025, the firm added, with most individual country benchmarks, particularly Italy and Spain, closing the year at multi-year highs.
UK equities had a good run in the second half of 2025, analysts noted, as the Morningstar UK All Cap index closed 2025 up 24.8%. However, despite attractive valuations, allocations remained firmly out of favour with investors.
In contrast, emerging markets equities benefitted from the weaker US dollar and technology companies in markets like Korea and Taiwan. Sentiment was also aided by easing tensions between China and the US on tariffs.
The firm noted market conditions allowed active bond managers to add value through duration and sector calls.
It said that despite falling interest rates, long-term bond yields stayed high in most regions because of fiscal concerns, while short-term yields reflected monetary policy changes, resulting in steeper yield curves in most cases.
