IT is not often that you hear names from the fund management world mentioned on the Radio Six Music news, but so far is the reach of Woodford Investment Management and so famous its star manager Neil Woodford that news of his recent fall from grace was reported on that channel’s hourly bulletin. If ever there was a sign of the enormity of the situation that was it.

For anyone who has been living in a bubble for the past few weeks the story goes a little something like this: after starting his career in low level City jobs, Mr Woodford joined investment house Invesco Perpetual in 1988, where he rose to become its head of investments and ran £25 billion of assets across flagship funds including Invesco Perpetual Equity Income.

Those funds fared well, earning Mr Woodford the mythical status of Star Manager, so much so that when he decided to split from Invesco in 2014 his new fund, Woodford Equity Income, set a UK record by attracting £1.6bn of investment in just two weeks.

Helped in no small part by the influence of advisory business Hargreaves Lansdown, which had long championed the Woodford approach, the cash continued to flood in, and Mr Woodford had to take ever riskier bets in order to invest it. When the illiquid assets he turned to, including property, loans and unlisted companies, started to have a negative impact on performance, though, Mr Woodford’s star started to wane and investors, understandably, decided they wanted out.

The problem is that he couldn’t realise the assets fast enough to reimburse them and the fund was duly suspended at the beginning of this month, trapping millions of investors in an underperforming portfolio from which Mr Woodford and his colleagues are continuing to earn a £100,000 daily fee for running.

On the one hand it is a tale of great personal hubris; of the vanity of a man who thought the performance he achieved while part of an investment machine like Invesco Perpetual was down to him and him alone. On the other, it is a story that highlights one of the great conundrums of the investment world, where debate continues to rage over whether active investors can ever have the skill to generate greater returns than the markets they pick their stocks from.

For Patrick Ring, a reader in financial services at Glasgow Caledonian University, while active investors like Mr Woodford can claim to add value by combining select investments in just the right mix, the evidence suggests that passive strategies - which track the performance of an entire market or asset class - tend to do better over the longer term.

“The academic research tends to agree that over the longer term passive works out better than active,” he said.

“You still get plenty of people arguing for active, maybe because they want exposure to particular areas of the market, such as small caps.

“The other reason is that if you think about behavioural finance people always feel an amount of loss more than the same amount of gain. During downturns people will think about an active manager because if you’re in a passive fund you’ll just see it going down all the time.”

Rob Davies, who manages the VT Munro Smart-Beta UK Fund, said the main benefit of investing in a passive vehicle like his over an active one is that it is easier to gauge how it is likely to perform.

“You know what you’re going to get,” he said. “With an active fund like Woodford’s it really depends on the feeling in his waters. There’s less potential for surprises with a passive fund – you’ll just get the index return.”

Despite this, Jeremy Fawcett of investment research business Platforum noted that one of the benefits of active funds that should not be overlooked is that they can invest in companies that are not listed on any public market – just as Mr Woodford did. While that brings obvious added risks, it also creates the potential to make significant returns.

“If most retail investors are steered away from investing in illiquid assets, there’s a danger that they will be prevented from getting their hands on the good stuff,” he said. “That wouldn’t be a good consumer outcome either.”

As Investment Association chief executive Chris Cummings said the key is for fund managers to ensure that investors know what they are doing so they can decide whether they are comfortable with the risk-reward profile.

“Any fund that invests in [illiquid assets] must be open and transparent about adopting this approach so its customers can decide if it is right for them,” he said.

The problem is, with workplace-pension strategies meaning many people end up in investment funds by default, how many of us can say for sure that we’ve actively made that decision?