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The Active Edge
GIVE YOURSELF A HEIGHTENED PERSPECTIVE
Investors see the value of active management as volatility intensifies
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Focusing too much on minimising risk in private equity can come at the cost of enhanced risk-adjusted returns. Concentrating on the smaller end of the buyout market – and being highly selective about managers and investments – could hold the key to maximising potential outperformance.
Fortune favours the small… and brave
Our latest insights
With rising uncertainty on their radar, investors seek to make their portfolios more resilient. They see active investment management as key to the solution.
The old “active vs passive” debate is dead – here’s why
Building portfolio resilience: why today’s approach needs to be different
Previous insights
Where is the familiar scepticism toward active management? Weren’t active investment strategies, especially in liquid markets like the US, supposed to be facing extinction? That was only a few years ago, but the debate has moved on by leagues. The binary poles of active and passive are less relevant by the day. For one, there has been an explosion in recent years of passive funds which do not track broad indices: they focus instead on themes, styles, regions or other sub-categories. They may be passive, but the process of using them as building blocks within a portfolio is distinctly active. Other factors are also driving a re-appraisal of the stereotyped active v passive standoff. For instance, market volatility of recent months has brought home the concentration risk bound up in broad indices, whether these are global or US. Almost three quarters of the MSCI World Index is made up of US companies and just ten stocks, primarily tech, comprise half of that. To be fair, passive participation in the journey to that concentration has worked well for investors. Since 2010 the S&P500 has produced annual returns of almost 14%. As the dollar strengthened and US equities cemented their dominance, they significantly outperformed other world markets. But the dangers were brought home sharply in April’s sell-off triggered by Trump’s “Liberation Day” tariffs. Complacency rapidly evaporated.
The use of assets is evolving, and growing appetite for private markets is changing the story
Return to home
Group CEO of Schroders
As investors grasp the dangers of market concentration and turn increasingly to specialist investment vehicles and private markets, it’s time we acknowledge that active investment management is about far more than stock selection.
Richard Oldfield
What we’re seeing among investors now is a more deliberate approach, and a need for strategy. In Schroders’ latest Global Investor Insights Survey – conducted among 995 professional investors from around the world representing $67 trillion in assets – 80% of respondents say they are more likely to use actively-managed strategies in the next 12 months. The survey was undertaken in April-May. Investors now want to build resilience into portfolios, and they’re looking to do it by diversifying across geographies, styles and asset classes. Many are reducing dollar exposure. This is a noteworthy reversal: the previous reflex at times of uncertainty was to view the dollar and US assets as safe havens. Capital is now shifting to Europe, Asia, or emerging markets. It’s also about style. Confronted with the pitfalls of an index, investors want an approach which is anticipatory or contrarian. For much of the past two decades macro factors (low interest rates, abundant liquidity, US exceptionalism) have lifted all assets. With a backdrop of increased volatility, micro factors (individual companies’ earning resilience, for example) are now coming to the fore. The need to look ahead is more pressing. What lies around the corner? One solution could be a value approach, where underpriced holdings offer a safety margin; others could be thematic, anchored on an industry or trend.
Aside from today’s yoyo of US policymaking, there are underlying global problems which will long outlive Trump’s presidency. One is ballooning sovereign debt. This is a major cause of fixed income market uncertainty: yields will be higher, but there will be higher structural volatility. So where investors seek income, bonds may be the answer – or one part of it. Another eye-catching outcome of the Global Investor Insight Survey was that private debt and credit alternatives are soaring in popularity. They are now the most attractive assets for investors wanting income. If a future income solution is one which offers both public and private debt together, that makes the traditional debate between active and passive fade to irrelevance. The same goes for public and private equity.
Distributed ledger tech, AI and cheaper computing are propelling us towards investment solutions that will be more sophisticated – more investor-specific – than the familiar fund structures of today. Private investors will have tailored portfolios geared around personal goals and dates. Pension funds will have sustainability preferences embedded in portfolio construction. The simplistic poles of passive vs active – far less relevant than the main aim of solving the investor’s problem – don’t belong in this picture. One swallow doesn’t make a summer, and future capital flows will be the proof of my argument. The rise of passive investing has been a theme of the investment industry for the past 25 years, but it’s been a story shaped by the investment industry, not necessarily by what’s best for investors. Now we’re at a turning point.
New technologies will bring the focus back to investors’ needs
Whether building portfolio resilience, seeking return opportunities, generating income or decarbonising your portfolio, we offer a heightened perspective to help you stay ahead. Learn more on our active perspective
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“Investors now want to build resilience into portfolios, and they’re looking to do it by diversifying across geographies, styles and asset classes”
Head of Multi-Asset Growth and Income
Remi Olu-Pitan, CFA
Read the rest of article to explore what structural changes mean for financial markets and how to achieve portfolio resilience.
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“Today private equity and debt form a combined $13 trillion market, up from less than $1 trillion two decades ago”
For decades, diversification strategies focused on the two traditional asset classes: stocks and bonds. The use of these assets evolved significantly, but they remained core building blocks. Two critical factors had to remain in place, however, for this strategy to keep working: a low correlation between the two asset classes and limited volatility for bonds, given the reliance on them as a source of stability. Among other structural market changes, these two factors are no longer in place. As a result, an era of simplistic portfolio construction – with its reliance upon asset class assumptions that no longer hold true – is over. Creating resilience within portfolios requires a new approach and a new asset mix.
In the “safety first” period after World War II, investors considered capital preservation their top priority, and portfolios were weighted heavily toward fixed income. As the long-term growth that equities could deliver became increasingly apparent in subsequent decades, the 60/40 approach to diversification emerged. Even as investors pursued the higher long-term gains stocks offered with a 60% allocation, keeping portfolios 40% invested in fixed income proved a reliable means to achieve stability. Some investors even sought exposures beyond 100% limits of their portfolios by deploying leverage. By the late 1980s, many large institutions began to add alternative investments, including private markets, to their allocations. By the early 2000s, the allocation to “alts” among large institutional investors often reached 15%-20%. But for most individual investors, small institutional investors, and many defined contribution retirement plans, the 60/40 portfolio remained the trusted approach to diversification. Markets helped: from the mid-1990s to 2021, a low, often negative, correlation between stocks and bonds contributed to the effectiveness of the 60/40 approach. Recent years have confounded those expectations. Since 2022, global bond markets have been much more volatile (Chart 1) and that has made bonds a less dependable source of returns (Chart 2).
Asset allocation: what worked in the past, and why it’s not working now
To understand why the old assumptions no longer work, it’s important to consider how the environment has changed and whether current circumstances will persist. We identify several long-term trends and resulting market conditions that we believe will extend into 2026 and beyond. Increasing government debt Government debt levels continue to soar, particularly in developed economies. Politicians have shown an unwillingness to address the underlying issues, creating uncertainty in bond markets which were previously considered creditworthy. Aging populations In most developed and several emerging markets, aging populations result in shrinking workforces and are likely to exacerbate government debt challenges. Interest rates to remain higher Even without the potentially inflationary US tariff proposals laid out by the Trump administration, several factors look set to keep inflation high. These include tight labour markets, lingering supply chain constraints, ongoing deglobalisation and the longer-term costs associated with decarbonisation. The period of near-zero interest rates is squarely behind us.
Recognising structural external changes...
Structural changes in financial markets mean we need a different mix of asset classes to deliver dependable returns.
1. Since 2022, bonds have exhibited much higher levels of volatility
Source: Bloomberg, Robert Shiller, Schroders, LSEG Datastream. As at 11 July 2025. Past performance is not a guide to future results.
The correlation between bond and equity returns rose significantly in the aftermath of the Covid-19 pandemic from a combination of factors that adversely affected both markets, including a spike in inflation driven by supply-chain challenges, soaring interest rates, a surge in commodity prices and geopolitical turmoil (Chart 3). The correlation has remained at elevated levels. As a result of all this, the 60/40 portfolio experienced severely negative returns, as exemplified by a US-focused portfolio. With its exposure to the S&P 500 Index and US Treasury bonds, the 60/40 portfolio was down nearly 18% in 2022, posting its worst year since 1937.1
Source: Global Government Bond Index. Bloomberg, Robert Shiller, Schroders, LSEG Datastream. 31 December 1990 = 100. As at 11 July 2025. Past performance is not a guide to future results.
2. With recent volatility, bonds struggled to deliver reliable returns
Source: Robert Shiller, Schroders, LSEG Datastream. Equity returns are represented by the returns of the S&P 500 Index; bonds, by the 10-year US Treasury. As at 11 July 2025. Past performance is not a guide to future results.
3. Correlations between stocks and bonds have turned highly positive
The comparatively benign years that followed the financial crisis of 2008-2009, when equities soared amid a backdrop of near-zero interest rates and low inflation, are over. Slower growth and persistent inflation raise concerns for both bond and equity markets and suggest consistently higher volatility. Along with this volatility, the correlation between stocks and bonds is likely to remain high. In this changed scenario although bonds may be less reliable as diversifiers, the return of higher yields makes them potentially attractive sources of income. Shifts in market composition are also a factor, and that means investors need to look to a broader range of assets to meet their needs. The universe of equities quoted on the world’s major public stock markets continues to shrink. More companies are now raising finance via private market channels. Today private equity and debt form a combined $13 trillion market, up from less than $1 trillion two decades ago. Within the sphere of public equities market composition has also changed. The post-financial crisis period saw the emergence of mega-cap US stocks as a dominating force in global indices. By the start of 2025, US equities comprised over 70% of the MSCI World index and much of this dominance was due to fewer than 10 stocks.
…and distilling what they mean for financial markets
MOVE Bond volatility Index
Average 2022-2025
Global Government Bond Index
Give yourself The Active Edge. Whether building portfolio resilience, seeking return opportunities, generating income or decarbonising your portfolio, we offer a heightened perspective to help you stay ahead. Learn more on our active perspective: What we do | Schroders
“Four in five investors say they are more likely to invest more into actively-managed strategies in the coming 12 months”
As investors around the world acknowledge significant risks in 2025 and beyond, a large majority (75%) also believe actively managed strategies offer value in current markets. An even bigger proportion – four out of five – say they will increase ther investment in active strategies over the coming 12 months. Schroders Global Investor Insights Survey, which polled the attitudes of almost 1,000 professional investors from around the world, captured the shift in market sentiment which occurred in the first half of 2025 triggered in large part by US trade policy announcements. The survey was undertaken from mid-April, a fortnight after President’s Trump’s so-called “Liberation Day”, on which initial US tariff policies were declared. Markets fell sharply in response.
Investors were asked to rate their greatest concerns on a scale of one to four. The vast majority (63%) cited US trade and tariff policy as their chief worry. However, economic performance, inflation and higher interest rates also featured. After tariffs, the next three areas of concern – economic downturn, higher inflation and higher interest rates – were broadly equal in ranking. This ties in with another major source of financial market volatility during the first half of 2025: questions over the sustainability of national debt for major global economies including the US, Japan and other G7 countries. Higher interest rates are pushing up the debt-servicing costs of the world’s biggest economies. Weaker economic growth would likely worsen this position. Bond markets have experienced volatility as a result, and the survey findings suggest investors anticipate more related uncertainty ahead. When asked to rank their assessment of volatility today against previous market shocks, one in four respondents said they expect greater volatility in the coming 12 months compared to both the COVID-19 epidemic and the global financial crisis of 2008.
Global trade policy ranks as investors’ primary concern, but economic growth and interest rates are also on the radar
Four in five investors say they are more likely to invest more into actively-managed strategies in the coming 12 months. This is linked to other findings where investors see active management as better suited to successfully navigating a more complex period in markets than a passive index-tracking approach. When asked to identify which attributes of active management held the greatest appeal, respondents cited a range of factors, first of which was the ability to capture returns wherever they arise. Achieveing portfolio resilience was the second most valued attribute. Active management was also seen to bring "deep specialist knowledge". Johanna Kyrklund, Schroders’ Group CIO, said: “The wider backdrop is that financial markets are still adjusting back to structurally higher interest rates, made painful in many cases by high levels of debt. This is raising questions about future market trends and the value of passive approaches in a period of greater uncertainty.”
Portfolio resilience is associated with active investment strategies and a mix of public market and private market assets
What do you consider to be the most significant macro-economic considerations impacting your investment strategy in the next 12 months?
Source: Schroders Global Investor Insights Survey 2025. Respondents were surveyed from April-May 2025. Respondents were asked to rate on a scale of 1-4 where 1 = Significant influence. % Rank 1.614988
Given the above volatility and the risks perceived by investors, achieving “portfolio resilience” was the goal of the majority of investors (55%), ahead of return generation and income. “Portfolio resilience” is not to be confused with risk aversion. A majority of investors (62%) are maintaining or increasing their risk appetite in the current environment. This suggests that many see opportunities as well as risk within current volatility.
Source: Schroders Global Investor Insights Survey 2025. Respondents were surveyed from April-May 2025. 614988
Which of these indices give you the greatest cause for concern about market concentration? Select all that apply.
Source: Schroders Global Investor Insights Survey 2025. Respondents were surveyed from April-May 2025. For illustrative purposes only and not a recommendation to buy/sell. 614988
What are the factors that you most value from the active managers you currently work with? Select up to three.
While the high level of confidence in actively-managed investments was one of the stand-out themes of this year’s survey, so was the high degree of interest in using a mix of both public and private assets. When asked which two asset classes they would use to access the best return opportunities, 46% cited public equities and 45% cited private equities. Interestingly, the third asset class cited here (by 40%) was another private market category – private debt and credit alternatives (PDCA). Again, when it came to generating income, PDCA was a priority, with over 40% of both institutional investors and wealth gatekeepers looking to these assets to meet their income needs. High yielding publicly-traded equities and public-traded bonds came a close second and third. “The ability to access diversifying and flexible income through the wide universe of securitised and asset-backed finance provides a valuable extension of the fixed income toolkit for investors,” said Michelle Russell-Dowe, Schroders Capital’s Co-Head, Private Debt and Credit Alternatives.
Tariffs/protectionist trade policies
Economic downturn
Higher inflation
Higher interest rates for longer
Increased regulation
Supply chain distruption
Lower rates
Climate risk
0%
10%
20%
30%
40%
50%
60%
70%
63%
6%
5%
4%
1%
In public equities, the volatility sparked by US tariff announcements in April was an unwelcome reminder that markets had become increasingly concentrated around US equities, and around giant US tech companies especially. By the start of this year global indices, such as the MSCI World, comprised over 70% US stocks. So when asked which indices posed greatest concentration risk, three quarters of investors (74%) cited the US S&P500 index. The global MSCI World index was the next greatest cause for concern, likely due to its extreme US tilt.
Volatility has brought home the danger of market concentration
80%
S&P 500
MSCI World Index
MSCI Asia Pacific
MSCI Europe
MSCI Emerging Markets Index
FTSE All Share
Topix
Other
I'm not worried about market concentration
74%
32%
16%
15%
14%
8%
In the face of these risk factors, investors want to make portfolios more resilient
Ability to capture opportunities wherever they are
Enhancing portfolio resilience over the long-term
Deep technical and specialised knowledge
Focus on addressing my long-term goals
Thought leadership and investment education
Improved the value of holdings through engagement
Accessing global mega themes such as decarbonisation/ technological disruption
Rigorous research into companies and industries
52%
59%
48%
49%
47%
46%
43%
42%
44%
29%
27%
23%
24%
19%
18%
All (n = 995)
Institutional Investors (n = 745)
Wealth Gatekeepers (n = 250)
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Head of Business Development Australia, Private Equity
Claire Smith
Read the rest of article including: Performance differentials between private equity managers Schroders Capital’s deal selection process Why fortune favours the small
“Why would one invest in a market segment that has a higher chance of loss? Only if you believe the manager can outperform the benchmark and so the potential rewards are greater”
It is a truism that generating a return over the risk-free rate requires taking risk. Some amount of risk aversion is part of prudent investing. But at what point does it work against the interests of investors? At what point does it poison the chalice? Recent research1 suggests that loss avoidance is not correlated with higher returns. This can be understood through the prism of loss ratios, defined as the realised or latest value of an investment below invested capital. If you invest $1 into a company, this covers the probability of receiving, or valuing the investment at, anywhere from $0 to 99c. According to authors Maria N. Borysoff of George Mason University School of Business and Gregory W. Brown of UNC Institute for Private Capital: “While loss avoidance during the fundraising period benefits fund managers, investors get a lower fund return from loss-avoiding GPs after the fund is fully realized… we show that the use of loss ratios as a risk metric is suspect, as there is no observable correlation between loss ratios and the standard deviation of deal MOICs [Multiple on Invested Capital] at the fund-level.” In other words, low loss ratios do not themselves contribute to higher returns for investors, and chasing them for their own sake can lead to sub-optimal results. By corollary, when undertaken with the appropriate skills and capabilities, operating in a riskier part of the market is justified when it offers more attractive returns over the long-term. Schroders Capital exists to deliver return for its investors over the long term, and that is why we invest in the small and mid-market. Small and mid-cap buyouts exhibit higher than average risk ratios, but they also offer more opportunity to outperform. Crucially, though, we do it with a platform that is proven, repeatable, and that helps offset the risk inherent in this part of the market.
Global private equity exhibits an overall loss ratio of 8.31%. The small and mid-cap segment of the market, defined as companies with an enterprise value of less than $1 billon, exhibits a loss ratio of roughly 100bps above that average, while large caps have a loss ratio roughly 300bps below it.
The juice is worth the squeeze
But achieving a low loss ratio in a part of the market with a higher than average loss ratio is not reason enough to invest. Indeed, why would one invest in a market segment that has a higher chance of loss? Only if you believe the manager can outperform the benchmark and so the potential rewards are greater. And they are greater. Schroders Capital's direct/co-investments have outperformed both the broader private equity market, defined using the Cambridge Associate Private Equity Index, and listed markets over five and 10-year time horizons.
Preqin stats on industry losses
Source: Preqin, September 2024. PE Buyout deal level loss ratios covering all investments between 2004 –September 2024. % of Aggregated Deal amount: Loss amount total / invested capital total. Past performance is not an indicator of future performance and may not be repeated.
Schroders Capital’s direct/co-investment book lives in the small and mid-cap part of the market and has incurred a loss ratio of 8.1%.
Source: Preqin, Schroders Capital, 2024. Preqin PE Buyout deal level loss ratios covering all investments between 2004 –September 2024. Schroders Capital‘s loss ratio consistently defined as total loss amount value below 1x divided by total invested capital of all 199 growth and buyout direct/co-investments Schroders Capital has completed as of Q3 2024. All 199 growth and buyout direct/co-investments made by Schroders Capital have been included in the analysis. Past performance is not an indicator of future performance and may not be repeated.
Schroders Capital’s loss ratio versus Preqin industry averages
Source: Cambridge Associates LLC, Schroders Capital, 2025. The index is a horizon calculation based on data compiled from 2,879 private equity funds, including fully liquidated partnerships, formed between 1986 and 2024. CA Modified Public Market Equivalent (CA mPME) replicates private investment performance under public market conditions. The public index’s shares are purchased and sold according to the private fund cashflow schedule, with distributions calculated in the same proportion as the private fund, and mPME NAV is a function of mPME cashflows and public index returns. Schroders Capital 5/10-year horizon performance shown are as of Q3 2024 and net of underlying fund fees, expenses and performance fees, and gross of Schroders Capital’s fund fees, expenses and performance fees. Figures include 199 buyout and growth co-investments since 2013, the date of the first co-investment made by Schroders Capital. Past performance is not an indicator of future performance and may not be repeated.
Comparison of public, private and Schroders Capital returns
Having highlighted the outperformance Schroders Capital is able to generate in the small and mid-cap private equity market, let’s now dig into the factors driving this performance. We’ve written previously about the benefits of the small to mid-cap segment of the private equity universe, and why this part of the market generally outperforms the large cap part of the market. Small and mid-cap private equity covers only 30% of capital by dollar, but 99% of companies by number. In other words, in the large-cap segment more than 3x the amount of capital is fishing in an opportunity set which is approximately one hundred times smaller. This imbalance between capital supply and demand provides fertile ground for investment based on a far larger opportunity set and relatively less competition, providing high-quality investments at lower entry multiples (typically expressed as EV/EBITDA). This has been particularly pronounced over the past five years, which saw large-cap private equity capture an even greater share of fundraising. While small and mid-sized companies have always traded at a discount to large companies, this valuation gap has significantly widened over the last few years.
Vahit Alili
Senior Investment Director Private Equity
% of Aggregated Deal Amount
Loss Amount
Overall
Large Cap (≥ USD $1BN)
Small/Mid Cap (> USD $1bn)
Global
North America Focused
Europe Focused
8.31%
8.03%
8.15%
5.34%
5.55%
4.11%
9.37%
8.37%
9.64%
Loss ratio
2%
Schroders Capital
Large Cap (≥ USD $1bn)
Horizon return
25%
10 year
5 year
1. Source: Borysoff (Nykyforovych), Maria and Brown, Gregory W., Loss Avoidance in Private Equity (January 26, 2024). Donald G. Costello College of Business at George Mason University Research Paper, Kenan Institute of Private Enterprise Research Paper.
Schroders Capital PE
CA Private Equity Index
MSCI ACWI (CA mPME)
