Active vs passive? Perhaps you’re asking the wrong question.

The investment industry loves a good debate. Few have endured quite like active versus passive.

During a Bonus Q&A for our Macro Moments Podcast  series, we were asked where we stood on the active versus passive debate. The more we explored the question, the more convinced I became that we're starting the debate in the wrong place.

By the time you're choosing between an active fund and a passive one, you've likely already made a series of active decisions that could have a greater impact on your portfolio than the fund itself. Decisions about asset allocation, regional exposure, risk preferences; rebalancing frequency.

Those can be seen as active management decisions and should be approached with due consideration.

That’s why I’ve never seen active and passive as opposing camps. They’re simply different investment approaches, each with a role to play within a portfolio. We often talk about passive instruments offering the most efficient means to access market breadth, whilst active investing offers depth. In fact, I'd go one step further.

“Many strong advocates for passive investments are actually active managers themselves”

It might sound counterintuitive at first. But pretty much every decision you make with regards to your portfolio is an active one. Preferences for one asset class or geographic region over another, for whatever reason, might be implemented using low-cost passive funds, but the thinking behind them is anything but passive. And if you’re only using passive instruments, then those active decisions are required to do much more of the heavy lifting.  

The decisions that shape portfolio outcomes are often made long before a fund is ever selected.

The debate starts too late

Active management is often reduced to one idea: stock picking skill. But it is much more than that.

Strategic asset allocation is active. Tactical asset allocation is active. Rebalancing is active.  Even choosing between active and passive instruments is a conscious, active one.

Each decision reflects a view of where opportunities and risks lie. Each has the potential to improve or detract from long-term outcomes.

That’s why I think the active versus passive debate often misses the bigger picture. It tends to focus on the final implementation, when many of the most impactful ones have already been made. Those decisions are the ones that active portfolio managers make every day.

Much of the debate is driven by the search for outperformance. How many active funds outperform?  How many don’t?

Those figures matter, but they rarely tell the whole story. It’s often more important to understand the why.

There are so many, often hidden, factors that influence a fund’s relative returns, not all of them a reflection of an active manager’s perceived skill or lack thereof. Fund objectives, the benchmark, investment constraints, risk limits and size, sector and style biases all play a part as well as stock picking and market timing.

From the outside, it’s easy to conclude that active management hasn’t delivered. The reality is often more nuanced. The challenge isn’t simply asking whether active funds outperform. It’s understanding where returns are really coming from.

Finding genuine skill

That’s one reason I’m interested in separating genuine investment skill, or more specifically, persistent stock-picking skill, from the other factors that influence portfolio performance.

Not every source of return reflects manager skill. Some simply reflect potentially unintentional exposure to different styles, sectors or parts of the market.

The goal is to isolate the element that really matters: the quality of the investment decisions themselves.

That’s where quantitative analysis can help. It allows us to look beyond headline performance and better understand what’s driving outcomes.

“Passive gives you broad, cost-efficient exposure to markets. Sometimes you want a bit of depth.”

I like that way of thinking about it because it captures the strengths of both approaches.

Passive investing gives investors efficient access to markets. Active investing offers the opportunity to be more selective where conviction is highest.

During the discussion, my colleague Michael Browne summed it up perfectly: “To make a great meal, you need several ingredients.” I think that’s exactly right. The strongest portfolios rarely rely on a single approach. They combine different tools, each chosen for the role it needs to play.

Neither is inherently better. They simply solve different problems.

The best portfolios often use both.

It’s never been about choosing sides

The active versus passive debate has become one of investing’s longest-running arguments. I’m not convinced it needs to be.

The question isn’t whether active always beats passive, or whether passive always costs less.

The question is whether you’re making thoughtful investment decisions at every stage of building a portfolio.

Because that’s where investing becomes active—long before you choose a fund.

Watch Oliver Wallin, Michael Browne and Stuart Kirk tackle audience questions on active versus passive investing, portfolio construction and other investment themes in the 17-minute Bonus Q&A from Episode 2 of the Macro Moments Podcast series.

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