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

Key takeaways

• Active investing means paying a fund manager to try to beat a market benchmark; passive investing means simply tracking one. Passive funds now manage the majority of US-domiciled assets, but active managers have tended to do better during periods of market concentration or correction.
• Active share, how different a fund's holdings are from its benchmark, is the clearest way to check whether you're actually getting active management or paying active fees for a passive-like portfolio. A high active share (above 80%) signals genuine active investing; a low one (below 60%) suggests closet tracking.
• Charities and institutional investors should review active share alongside fees as part of routine governance, not treat active vs passive as a one-off decision.

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.  

What is active and passive investing?

Active investing means paying a fund manager to select investments with the aim of beating a market benchmark. Passive investing means buying a fund that simply tracks a benchmark, accepting the market's return rather than trying to beat it. Both approaches carry risk, and neither guarantees a better outcome, which makes choosing the right approach difficult.

Pros and cons of active vs passive investing

Adopting active investing is a double-edged sword. The advantages and disadvantages both stem from active management, as doing more doesn’t always lead to better outcomes, despite the higher fees.

• Active investing: the potential to beat the market and manage risk through stock selection, at the cost of higher fees and manager-dependent performance.
• Passive investing: low costs and predictable, benchmark-matching returns, with no chance of outperformance and no ability to avoid overvalued areas of the market.

“Geese fly in gaggles, eagles fly alone” sums it up very well. 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 investing

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: Active investing is key to outperformance, but how?

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.

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 exhibits that 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. 

Choosing between passive and active investing

So, should you give your money to a goose or an eagle? At W1M, 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.

Get in touch about charity fund benchmarking or speak to our wealth managers about the right active-passive balance for your portfolio.

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FAQs: About active vs passive investing

What is active investing?

Active investing is an approach where a fund manager selects investments with the goal of outperforming a specific market benchmark, using research and judgement rather than simply tracking an index.

Is active or passive investing better?

Neither approach is universally better. Passive investing has outperformed on average over the past decade in some of the most efficient markets, while active managers have tended to do better during periods of market concentration or correction. The right mix depends on an investor's goals, time horizon and the specific market being accessed.

What is active share?

Active share measures how different a fund's holdings are from its benchmark index, expressed as a percentage. A high active share (typically above 80%) indicates a genuinely active portfolio, while a low active share (below 60%) suggests a fund that closely mirrors its benchmark despite charging active management fees.

Should charities and institutional investors use active or passive managers?

Many charities and institutions use a blend of both: passive funds for efficient, well-covered markets, and active managers where there's stronger evidence of manager skill. Trustees are increasingly expected to review active share alongside fees as part of their governance duties.

Is passive investing cheaper than active investing?

Yes, passive funds typically charge lower management fees than active funds because they don't require ongoing research, stock selection or trading decisions. Lower cost doesn't guarantee a better outcome once market conditions and risk are taken into account.