Active vs Passive Ready-Made Portfolios - The Performance Data Speaks

Our approach is disciplined. We invest based on fundamentals, not hype – and diversification, especially when global equity indices are so concentrated. Our view is that a well-diversified portfolio remains the best defence against uncertainty, helping investors capture upside potential while protecting against inflation, inevitable market corrections, and shifting global sentiment.

In 2026, for example, there are reasons to believe that financial market returns are likely to be well supported, but there are a range of risks: a new chair of the Federal Reserve in the US could change the central bank’s approach, market concentration is rising, and the possibility of an asset bubble is increasing. We believe these are risks that need to be managed carefully.

We believe that diversification matters more today than at any point in recent history. It is easy to believe that an index that represents the whole of the global equity market is well-diversified. However, the index may have become increasingly top heavy and concentrated. The MSCI ACWI index, for example, has almost 5% in one company, Nvidia, and the top 10 stocks (all of which are tech related companies) represent 23% of the index. That’s 10 companies representing 23% of the whole world’s market capitalisation (of large and mid-cap companies).

Meanwhile, the US accounts for more than 60% of the index, so if you are a non-US investor, you are betting a lot not just on the US stock market but also on the US dollar. The index is increasingly looking like a high conviction active portfolio, but without anyone doing the investment due diligence. They are simply relying on the (unreliable) wisdom of the crowd.

We think carefully about the regions to which we want to allocate our clients’ capital, plus the size of the allocation required to mitigate the risks that have built up in these increasingly concentrated indices.

Ultimately, there’s no such thing as a passive multi asset portfolio. Investors have to make active asset allocation decisions. Even if you only wanted to invest in the ACWI index and a bond index, say Global Aggregate, you still need to work out your weighting between the two, and 60/40 probably isn’t the right answer. Therefore, a rigorous asset allocation process that is reviewed with appropriate frequency is absolutely vital.

UK domestic equities are regarded as less risky for UK investors given they are priced in sterling. Of course, there is currency risk in the earnings of these companies – around three-quarters of FTSE 100 earnings come from overseas – but at least the share prices themselves aren’t directly affected by swings in currencies. This is part of the reason our optimised strategic asset allocation (SAA) likes to allocate to the UK.

The UK bias in most of the portfolios has reduced a bit in recent years, in line with where we foresee the best return opportunities. Adventurous is an exception – it used to be ex-UK, so it could get up to the appropriate amount of volatility. Having more US and less UK was a fantastic trade over the past decade, but when we updated the SAA in 2024, we added the UK back in. We preferred to have the portfolio running with a bit less volatility (but still within the Adventurous band), but to be more diversified, given stretched valuations in the US and risks that we could see brewing relating to US index concentration. Put most simply, the US had a good run, so the prudent move was to take some chips off the table.

As much as we can try to predict the future, we really don’t know what will happen, so spreading our bets is a vastly more sensible strategy than putting all our eggs in one basket. We may not be the top performing fund in the short term – there will always be someone who guessed right and had all their equity exposure in, say, South Korea last year, but that doesn’t give you many paths to victory in an uncertain world. Over the long-term, we want to give ourselves as many ways to win as possible.

Over the medium to long term, markets typically trend up or down (usually up), but day-to-day, the moves are essentially random. This means that in sideways markets, you can pick up a rebalancing return by selling winners to lock in profits and topping up losers to take advantage of price weakness. This return is difficult to attribute accurately, but it is very much real. You do have to consider trading costs – very tiny trades aren’t worthwhile.

We also rebalance relatively daily, so we don’t inadvertently become overexposed to an asset class or region that has done well recently (and might be due a pull back).

Very important and often overlooked. Different fund providers are better at different things. Tax efficiency needs to be considered, too. A great example is our holding in the Amundi Core MSCI Emerging Markets Swap ETF. By holding a swap ETF rather than a physical ETF, you avoid capital gains tax on Indian and Brazilian stocks, and at times, you can also be paid extra to be long Chinese stocks (because there is excess demand from hedge funds to short them). This delivers consistent and repeatable outperformance vs a physically replicated ETF or index fund.

The passive range doesn’t do short-term tactical trades. We also only have exposure to regional cap weighted indices – no MSCI USA Value, for example. This means we do not strive to profit from rotations within regions. This means we have not been responding to the recent volatility in the technology sector, for example.

That said, we remain well diversified. Around 35% of our equity exposure is in the US compared to nearly double that in the MSCI ACWI, so we are well placed to capitalise on US underperformance should it continue.

Passive is clearly in vogue and has had a lot of tailwinds in recent years, but many indices increasingly look like high conviction active portfolios. This is OK, but investors need to go in with their eyes open and understand the risks - the US index doesn’t offer the same sort of diversification that it used to, with returns very dependent on mega cap tech. This can be partly mitigated through regional and asset class diversification, but active managers can help you go even further.

Most passives are just equities and bonds. We also have alternatives (and cash) in our passive funds to protect better even when bonds don’t – like in 2022.

Passive doesn’t just mean set and forget. Different providers have different degrees of rigor they place on asset allocation and fund selection. It’s important to pick a good provider and not assume that there isn’t a lot of difference between passive options.

Ultimately, active or blended portfolios should outperform in the long run, but can have long periods where they don’t. That doesn’t mean active is broken forever, you just have to be patient But as with passive multi asset, for active you’ve got to pick someone good.