The Simon Evan-Cook article referenced in Terry Smith's Letter to Shareholders
Not sure if everyone saw the article by Simon Evan-Cook that was referenced in Terry's recent and now infamous letter to shareholders. See it below from Citywire. Can't post the one graphic from teh article since this sub doesn't allow images (why?) but it basically shows average UK equity fund vs the market's rolling 3-year returns from Dec '99 to Dec '25. It shows massive underperformance by the Equity funds starting around Dec '21 (which makes sense).
FYI, i had no idea who Simon Evan-Cook is. He was a multi-asset PM, who seems actually to be a proponent of active management (you all can google and let us know if i'm mistaken).
Article below:
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# Can active still work in a passive market?
If the opportunity is big enough, then yes.
14 May, 2026
We meet our chosen fund managers all the time – part of our regime of half-yearly check-ups. Last month it was our UK equity managers’ turn, and we asked them what it takes to be a bottom-up stock picker in a market dominated by passive inflows and top-down themes.
We asked this for two reasons. Firstly, markets seem weird. Sometimes you can see this in the data, like the abnormal performance gap between the average fund and the market (see chart), or the valuation gaps opening up between large and small caps (which passive funds avoid). But other times it’s just a queasy sense that things are out of kilter.
And secondly, we were jolted by news that more US money is held in index funds than in active funds. And while the split in the UK still favours active, the flow away from active into passive is dramatic: Calastone data suggests £56bn has flowed into passive funds over the last three years, with £27bn flowing out of active funds. This is of market-warping size.
# Is it just us?
We asked our five UK equity managers – all proud fundamentals-based stock pickers – whether they shared our sense of ‘weirdness’ and, if they did, what does that look like?
All five agreed that today’s market is a different beat from when they started out. They cited various causes, including passive dominance, Model Portfolio Service (MPS) consolidation, persistent active outflows, and platform and hedge fund behaviour. Additionally, some pointed to the as-yet-unknown impact of Artificial Intelligence.
Whatever the reason, they add up to the same thing: market flows used to be background noise, but today they’re a primary driver of returns. Particularly in the smaller, less liquid parts of the market.
# Different times …
This interferes with their processes, which were designed before the recent changes in market action. They used to rely on getting their stock analysis right and spotting a mispriced company before the herd. But today this results in punishment, not reward, as flows continue to hammer a stock lower for longer.
If this sounds like whingeing, by the way, that certainly wasn’t their tone: all acknowledged the new reality with a pragmatic shrug, like a farmer accepting climate change.
This, of course, begged our next question: what, if anything, are they doing about it?
Here the answers varied. All agreed that liquidity is now poorer, and that holding concentrated positions is riskier.
# … may need different tactics
Three of the five have become more wary of ‘momentum’, and while they haven’t changed their view of what’s an attractive stock, they are taking actions like hanging back before buying or taking longer to build a position to full weight.
They’re keeping a closer eye on who else owns a stock too. If they know a stock has forced sellers (maybe a competitor’s fund that’s experiencing redemptions), they’ll hold off until that pressure abates.
The other two managers were less inclined to change their process. They believe that market timing is impossible to master and that potentially deeper downdrafts are simply the price to be paid for steeper outperformance when the market swings back.
I don’t take sides in this debate. Both perspectives make sense and only time will tell if one proves better than the other.
# Size of the prize
One thing our managers *did* agree on was the size of the opportunity in the UK market. Theirs is a target-rich environment. Small and mid-caps are on historically wide discounts compared with large caps, and domestic cyclicals are already pricing in extremely negative economic outcomes. At some unknowable point, they agree, UK small caps will make a lot of money.
These unusually attractive opportunities result from outflows from the usual holder base (active funds) as well as platform and MPS-driven selling. But they will only be seized by those with patience, discipline, and tolerance of underperformance – a dwindling pool in the UK right now.
# Risk and reward
This chimes with the findings in a [recent paper ](https://www.aqr.com/Insights/Perspectives/The-Less-Efficient-Market-Hypothesis)by AQR’s Cliff Asness. He acknowledges the risks of truly active management have risen, because nowadays you can look wrong for longer.
But the yin to that yang is that opportunities have grown too: when the market does snap back to fair value, it’s got further to travel. This means greater returns for the patient investor.
This seems a fair summary. At a time when global equities look worryingly expensive, there are incredible gains to be made from undervalued UK mid and small caps. There are costs though, and these come in the form of an unappealing narrative and an uncomfortable wait.
The choice is yours.