Why active management matters in changing markets

 For much of the past decade, global share market returns have been heavily influenced by a relatively small number of large companies. This has been particularly evident in the United States, where major technology and technology-related businesses have played an outsized role in driving index returns.

This environment has supported the rise of passive investing, in which funds aim to track a market index rather than select individual investments. Passive investments can be an effective way to gain broad, low-cost exposure to share markets, particularly when a small number of large companies are consistently leading returns.

However, markets do not stand still. While large technology companies continue to play an important role, a wider range of sectors and companies have started contributing more meaningfully to market performance. This broader participation can create a more favourable environment for active managers, who seek to identify opportunities that may be overlooked by the broader market.

Active managers take a different approach from passive funds. Rather than simply mirroring an index, they make decisions about which companies, sectors, or regions to hold based on their research and investment views. This gives them the flexibility to adjust portfolios as market conditions change, including reducing exposure to areas that appear expensive or concentrated, and increasing exposure to companies they believe offer better value or stronger long-term prospects.

The case for active management is not that it will outperform in every market environment. Some periods are more challenging, particularly when returns are driven by a narrow group of large companies that dominate indices. However, when performance becomes more varied across sectors, regions, and company sizes, the opportunity for skilled managers to add value through company selection and portfolio positioning can improve.

Importantly, this is not an argument for choosing active over passive in all circumstances. Both approaches can play an important role in a well-diversified portfolio. Passive investments provide efficient exposure to broad market returns, while active managers can bring flexibility, risk management, and the ability to look beyond the largest companies in an index.

In our portfolios, we place a strong emphasis on active management, complemented by selective use of passive investments. This reflects our belief that carefully selected active managers can help navigate changing market conditions, while passive investments provide simple and cost-effective exposure where appropriate.