Equity Making the case for active at the core

While the active/passive debate continues to shape industry discussion, it no longer provides the best framework for understanding how investment portfolios should be constructed.
 

Passive strategies can deliver efficient market exposure – but they are also backward-looking, constrained by index construction and increasingly shaped by market concentration. Active management adds the forward-looking element: the ability to adapt to changing conditions, differentiate between opportunities, and manage risks that indices may overlook. The debate is therefore no longer active versus passive, but how best to combine them.
 

Central to this situation is the common misconception that market benchmarks represent a ‘neutral’ starting point. Equity indices were designed to quantify market returns but, in practice, they increasingly determine how risk is measured, managers are assessed and portfolio ‘success’ is judged.
 

While seen as passive, every benchmark represents a series of active choices. Selecting the S&P 500 rather than the Russell 1000, for example, equal-weighted rather than market-cap-weighted, or developed markets rather than global equity allocations all create materially different outcomes over time. There is no truly neutral benchmark because each one reflects assumptions about economic leadership, market structure and risk allocation.
 

This becomes even more important in today’s environment because benchmark concentration has increased across global equities and returns have become increasingly influenced by a small number of companies. The ten largest stocks in the S&P 500, for example, now represent close to 40% of the index, a level not seen in the US since the mid-1960s, while semiconductor-related companies are approaching a fifth of the entire benchmark. 

Our argument is not that these companies are impaired in any way or artificial intelligence is overhyped as a theme. The issue is that market-cap-weighted benchmarks become most concentrated when confidence in a theme is highest. When this happens, benchmark construction increasingly assumes one outcome will dominate future returns.

Given this backdrop, the future of portfolio construction is unlikely to be purely active or passive. The most effective portfolios will likely combine passive efficiency with active judgement. A benchmark-aware, diversified and genuinely active core can play a defensible role in this structure.
 

Ultimately, investors are not seeking answers to an abstract debate about active versus passive, they are seeking reliable outcomes. The question is whether portfolios are constructed in a way that genuinely serves objectives. That requires thoughtful benchmark selection, deliberate risk-taking, robust research, long-term stewardship and clear alignment between objectives and implementation.
 

It also requires honesty about where active management adds value and where it does not. The case for active management at the core is not a defence of every active strategy; it is an argument for informed judgement in service of investor outcomes.