The debate between active and passive investing is one of the most contentious topics in financial markets. While some advisors swear by the simplicity and cost-effectiveness of passive funds, others advocate for the strategic opportunities provided by active managers. At IBOSS, we approach this debate with a balanced, agnostic perspective, recognising that both strategies have their place depending on the market environment and the client’s goals.
Market Context: Setting the Scene
In recent years, market conditions have largely favoured passive investments. Central bank interventions, momentum-driven markets, and extended periods that have rewarded high beta investments have allowed passive funds to shine, particularly in regions like the United States. For clients and advisors, this has raised the inevitable question: Why not just invest in passive funds?
However, markets are never static. The past is not a guarantee of future performance, and the tides may be turning. In today’s environment, characterised by heightened volatility, sector-specific risks, and global economic uncertainty, the opportunities for active managers may be more plentiful.
Active vs Passive: The Current Landscape
Equities
- Passive Strength in the US: Passive funds dominate the US equity market, with significant inflows surpassing active funds. Over the past decade, only a small proportion of active US equity managers have consistently outperformed their passive counterparts. However, much of this performance has been driven by the “Magnificent Seven” mega-cap stocks, which now account for over 30% of the S&P 500’s weighting. This concentration presents risks for passive investors who may not realise the extent of their exposure to just a few companies.
- Opportunities Outside the US: Outside the US, the case for active management is stronger. In regions like Asia, Europe and Emerging Markets, where economic conditions and sector dynamics vary significantly across regions, active managers may be better placed to take advantage of market inefficiencies. It is also worth noting that these areas suffer far less from overly concentrated indices.
Fixed Income
The fixed income space has seen a dramatic shift since 2021, back when interest rates were at historic lows. In this context we felt that passive strategies made sense as active managers had fewer tools in their kitbag and relied most heavily on credit spreads. However, with rates significantly higher today, active managers may be better placed “harvest volatility” and navigate opportunities not just in credit, but also duration.
Active and Passive in Multi-Asset Portfolios
IBOSS’ own portfolios illustrate how active and passive strategies can complement each other. Our core range is a mix of 75% active and 25% passive, and are adjusted dynamically based on the prevailing market conditions.
For example, in November 2021, our fixed income allocation was heavily tilted towards passives due to the limited scope for active outperformance. By 2024, however, the environment had shifted, and we reduced our passive exposure significantly to capitalise on active managers’ ability to navigate a more volatile rate environment.
Common Misconceptions
- Diversification in Passive Investing: While buying an index of stocks may seem diversified, they can often carry unintended concentration risks. For instance, the top ten holdings in the S&P 500 make up over 30% of the index, and the global stocks and shares index has a huge 72% weighting to US stocks. Similarly, some Asian passive funds are heavily weighted towards specific countries or sectors and may introduce unintended risk for investors if they are caught unaware.
- Performance Trends: The narrative that passive consistently outperforms active isn’t universally accurate. Over discrete calendar years, there are many instances where active managers have outperformed. What may come as a surprise is that passive funds had their best year in 2022 – a declining market – which heavily rewarded an allocation to the largest stocks in indices across the world.
IBOSS’ Approach: A Balanced Perspective
At IBOSS, we believe that the active vs passive debate isn’t about picking sides but understanding how each strategy fits into a broader investment philosophy. Here’s how we integrate both approaches:
- Core and Passive Ranges: Our core portfolios combine active and passive strategies, allowing us to adapt to market conditions while keeping costs in check. Meanwhile, our standalone passive range offers a low-cost solution for clients who prioritise fees. It is also worth noting that our passive range is actively manged to ensure broader diversification when compared to other multi asset active propositions.
- Dynamic Allocation: Our flexibility in adjusting active and passive weightings provides clients with exposure to a broad range of investment styles and ensures that portfolios are positioned to take advantage of a variety of opportunities whilst manging the risks of a changing market.
- Focus on Value: Whether active or passive, we prioritise funds that add genuine value to our portfolios. For active funds, this means identifying managers with proven track records of outperformance. For passive funds, it means ensuring cost-efficiency without compromising on diversification.
Final Thoughts
The choice between active and passive investing depends on your client’s objectives, risk tolerance, and market environment. At IBOSS, we see the value in both strategies and offer solutions that combine their strengths. By remaining flexible and impartial, we aim to deliver portfolios that adapt to changing conditions while staying aligned with the needs of advisors and their clients.
As always, if you’d like to learn more about how IBOSS integrates active and passive investments into our portfolios, or if you have specific questions, please don’t hesitate to get in touch.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
Data is provided by Financial Express (FE). Care has been taken to ensure that the information is correct but FE neither warrants, neither represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Please note FE data should only be given to retail clients if the IFA firm has the relevant licence with FE.
IBOSS Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
Registered Office is the same: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.
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