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GIVE YOURSELF A HEIGHTENED PERSPECTIVE

The old “active vs passive” debate is dead – here’s why

Structural changes in financial markets mean we need a different mix of asset classes to deliver dependable returns.

Building portfolio resilience: why today’s approach needs to be different

Our latest insights

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.

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

The old “active vs passive” debate is dead – here’s why

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Group CEO of Schroders

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

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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”

Building portfolio resilience: why today’s approach needs to be different

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.

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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

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Source: Bloomberg, Robert Shiller, Schroders, LSEG Datastream. As at 11 July 2025. Past performance is not a guide to future results.

MOVE Bond volatility Index

Average 2022-2025

MOVE Bond volatility Index

Global Government Bond Index