Monday, November 24, 2025
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The investment management debate persists: active or passive? Yet framing this as a binary choice misses a more sophisticated reality. Both approaches possess genuine merit, and the question isn’t which to choose but how much of each belongs in a well-constructed portfolio.
Often conversations with financial advisers are fixated on index trackers revealing the limitations of dogmatic thinking. There is more to it!
Active management rests on a compelling premise: skilled fund managers deploying expertise and rigorous risk management should justify higher fees through superior returns. Of 3,200 active funds analysed in 2024, 42% outperformed their average passive peer. More tellingly, 107 U.S. large-cap active equity funds outperformed their benchmark over 20 years, with median outperformance of 0.6 percentage points annually.
Compounding matters. The mathematics of compounding transforms modest differentials into substantial wealth. An investor with £1 million earning 8% annually reaches £4.66 million after 20 years. Capturing an additional 60 basis points through skilled active management accumulates £5.11 million—a £450,000 premium that comprehensively justifies management fees.
Active management typically outperforms during market corrections, capturing more upside as markets recover. This defensive characteristic proves invaluable when portfolios face maximum stress. The cyclical nature of active performance deserves attention: from 2000 to 2009, active outperformed nine out of ten times, and over 35 years, active outperformed 17 times whilst passive outperformed 18 times. This near parity suggests market environments favour different approaches, and rigid adherence to either philosophy guarantees missing opportunities.
Index tracking delivers precisely what it promises: market returns minus minimal fees, with perfect transparency. In early 2025, passively managed assets grew to over $16 trillion, whilst actively managed assets stood at just over $14.1 trillion—a milestone reflecting genuine investor preference.
The fee differential carries undeniable significance. Compounding works relentlessly in both directions, and each basis point surrendered represents capital unavailable for reinvestment. For large-cap developed markets where analyst coverage saturates every security, passive strategies deliver admirable results.
Yet passive investing carries risks. It pays no attention to valuation. When market concentration reaches extremes, index investors accumulate maximum exposure to securities trading at maximum valuations—a combination violating elementary investment prudence.
Emerging markets in 2024 provided an instructive laboratory. Return dispersion across countries was wide, with approximately 60% difference between the top performer (Taiwan, up 34%) and worst (Brazil, down 30%). Active managers capable of overweighting Taiwan whilst limiting Brazil exposure captured substantially superior returns. Advisers fixated on simple trackers missed this opportunity entirely.
The sophisticated approach recognises that active and passive management address different portfolio objectives. Core equity exposure to efficient developed markets may warrant predominantly passive implementation. Satellite positions in less efficient markets or specialised sectors provide fertile ground for active management to demonstrate value.
Fixed income presents particularly compelling active opportunities. Over the past decade, 45% of active fixed income managers beat their average passive peer, reflecting credit markets’ greater inefficiency.
The DCS approach embodies this synthesis through portfolios holding both strategies within risk-calibrated frameworks. Rather than forcing artificial either-or decisions, these solutions employ passive vehicles where markets demonstrate efficiency and active management where skill can generate excess returns.
Investment portfolios navigate varied conditions: bull markets and corrections, concentration and dispersion, efficiency and dislocation. The skilled navigator employs appropriate tools for prevailing conditions rather than insisting one instrument serves all purposes. Performance moves in cycles, with each style trading periods of outperformance.
Investors who prosper over genuine investment horizons will likely resist dogmatic adherence to either philosophy, instead employing both approaches strategically, remaining cognisant of their respective costs and benefits, and maintaining discipline through inevitable periods of underperformance. That discipline, perhaps more than any particular vehicle selection, ultimately determines investment success.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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