Active vs Passive: Geese fly in gaggles, eagles fly alone

In October 2024, we hosted an in-person event where we discussed one of the most enduring debates in investment management: active vs passive investing. With markets becoming increasingly concentrated and passive strategies continuing to dominate fund flows, the question of whether investors should stick with the herd or break away has never been more relevant. We explore this debate further in the article below.  

“Geese fly in gaggles, eagles fly alone” was the proverbial response to my frequent teenage petitions. The petitioner sought to dodge extra maths practice and instead spend Friday nights with his esteemed peers, indulging in the hedonistic Hooch-fuelled pursuits on offer at Fareham Leisure Centre playing fields. The petitioned (my mum), claims the musings of a great Chinese philosopher helped form her counterargument. However, given it was invariably followed by the much less sage “my house, my rules”, I think it may be safe to attribute the origin of these words as “uncertain”.

Had I been a more thoughtful teenager, I might have made the argument that there are times when doing exactly what everybody else is doing is an admirable strategy. There is both beauty and evolutionary practicality to a skein of geese (albeit not if they drink Hooch), and in early teenage years the advantages of the pack feel particularly acute. These advantages are the underpinnings of the passive investment management philosophy. Passive investors are comfortable in the gaggle. Buying in tandem with the masses and rarely deviating from consensus valuations. They act as price acceptors, taking corporate valuations as given rather than actively shaping them. Why do the work when you can copy someone else’s homework?

Copying hasn’t been a bad strategy over recent years. The swift and stratospheric rise of Nvidia’s share price is perhaps the best example. Passive investors allocated a nice slug of their capital into one of the greatest success stories of stock market history without even having to know what a Graphics Processing Unit is. Many, more expensive, active managers looked up from their homework, blinked, and missed it. In fact, the safety of the herd has never looked more appealing. As the chart below shows, for the first time in history the majority of US domiciled funds are managed passively, meaning that there is more capital in the hands of price acceptors rather than price determiners.

The Rise of Passive 

Source: Morningstar, Direct Asset Flows, Data as at 31.12.2023

Students of biology will not be surprised by the worrying corollary of this selection pressure; eagles acting like geese. So-called active managers are holding a dizzyingly high number of positions, and with a dismally low active share (a measure of how different your portfolio is to the market, soaring above 80% means you’re an eagle, flocking below 60% makes you a goose). Don’t think that their inability to keep up is the result of prudent decision making either; you won’t be surprised to hear that the fees these conformist predators are charging have evolved far less quickly. Following the wrong crowd has been another factor, large allocations to the UK (known as “home bias”) add equally large amounts of mud to the water. 

Assessing Charity Funds & The Active Share

Source: ARC, Waverton, Morningstar 

As you can tell it hasn’t been a fun 20 years for active managers. Designing portfolios to follow rather than lead has become the norm.  Sitting at home, practicing maths, and hoping to impress girls with in-depth corporate valuation models doesn’t seem to have worked out. Was mum wrong?

She certainly holds the moral high ground. You don’t have to read Niebuhr to know that in any group, peer pressure can lead to unscrupulous behaviour. Merely accepting the market allocation will mean funding companies that may not always align with your principles. Active managers go one further, using their votes to help influence corporate behaviour “My shares, my rules” perhaps. That said, nobody from Fareham can afford too many principles (case in point; Suella Braverman), so when might active managers make real money again?    

This question was the focus of a recent study by Furey Research. Their work found that significant outperformance of active managers tends to follow periods of intense concentration.   

Outperformance of Active Mangers Exhibit Seasonality
Outperformance tends to follow periods of intense concentration

Source: Waverton, Furey Research, Data from the CRSP database, Foundry Partners LLC, FactSet. As at 30.09.23

The theory makes a lot of sense. With Apple, Nvidia and Microsoft now over 20% of the S&P 500 index and having shouldered over a third of the total index’s return last year, it is mechanically difficult to beat the market whilst maintaining a diversified portfolio. The Pavlovian response also dominates. The regular rewards within the safety of the skein make it difficult to break from the crowd, even if independent thought might offer hope for survival during regime change. Indeed this theory aligns with our own lived experience, the Waverton Global Equity Fund which has outperformed the global equity benchmark by 190% (since inception in March 1999 to 31st January 2025) has thrived during periods of change, but it would be negligent not to highlight the spells of more pedestrian relative performance in the midst of its illustrious track record. We have spent our fair share of time inside studying whilst our friends had all the fun. 

So, should you give your money to a goose or an eagle? In our review of 2024 we have already outlined some of Waverton’s reasoning behind our optimistic expectation for broader market returns in 2025 (so far so good…). But we are unashamedly eagles and we don’t like geese. Were I to make a rare attempt at objectivity, I would suggest that whether you choose to soar alone, or join the gaggle is in the end a personal choice. Just don’t sit on the fence. Accepting the risk inherent in concentrated markets and paying active fees for the privilege is heads I win, tails you lose in the asset manager’s favour. My ornithologist’s checklist to avoid this common error is as follows:

• If you are paying for active management, make sure you are getting it. Ask potential managers about active share, how they are positioned differently and where they think outperformance will come from.
• Be wary of a dizzyingly high number of holdings. Has your potential manager committed the resource necessary to be genuinely active? Are they doing their homework, or just copying others?
• If your manager advertises as active, how are they active? Do they make large shifts in asset-allocation over time? Or do they have a bottom-up focus? If the latter, how focused are their portfolios? Can their favourite positions plausibly make a difference to the portfolio’s performance? If the former, how big are the shifts? Will they move the needle?

The answers to these questions should get you one step closer to a well-informed decision. My own opinion?

Always listen to mother.