The seemingly never ending debate over the benefits of active versus passive investing never seems to be resolved one way or the other, with polarising opinions across the industry in terms of cost and performance. We have never held a view over which is best and have always been strategy agnostic, offering both active, passive and hybrid portfolios to accommodate the needs of all client and adviser preferences.

While clients shouldn’ t base their choice of active or passive purely based on historical returns, it is important to note that the under or overperformance of each style tends to be cyclical.

Active-passive cycles track economic cycles.

One of the main reasons that active and passive performance is cyclical is because the performance of large and small companies, in terms of market capitalisation, is cyclical. Passive tracker funds tend to focus more on large cap stocks, for example, because those stocks are more established – and tracking established performance is what passive investing is about. Smaller companies generally have less information available compared to the

big names, so investing in small cap stocks requires some digging. Active stock-pickers – if they do it well – get their above-market returns by doing that digging and unearthing opportunities.

Most active fund managers try to buy assets they think are undervalued by other investors, and avoid assets they think are overvalued. That almost always means underweighting big cap stocks, relative to market cap, and overweighting small caps. For example, the‘ Magnificent Seven’ US technology stocks have become extremely highly valued in recent years, in terms of price-to-earnings ratios. Many active managers don’ t want to buy so much of that stock at those high valuations, so will often underweight them. Meanwhile, passive funds that just track market cap will buy those stocks to whatever degree they make up of overall market cap. The recent launch of Chinese AI app DeepSeek has demonstrated how vulnerable large caps can be to unexpected competition.

The performance of active investment is usually tied to the cycle of economy growth. A growing economy is historically more beneficial for smaller companies that have room to grow, so active managers that buy those stocks

46 | The Adviser