03 September 2026
3 min
Active and passive equity strategies are two fundamentally different ways of engaging with markets. Passive approaches aim to capture market returns by tracking an index, offering exposure to market beta at low cost and with minimal intervention. Active management seeks to outperform the market through security selection, top-down views or both, on the basis that markets are not fully efficient and that mispriced opportunities can be exploited. For the purposes of this discussion, we’re referring to market-cap passive equities, rather than systematic/alternative index-based approaches.
Over time, indices have become more than just tools for implementation. They now shape how investors understand markets, allocate capital and judge performance – a role reinforced by the rapid growth of passive investing. Passive strategies now account for more than half of global equity mutual fund and exchange-traded fund assets, up from around 25% in 2012[1].
While the last decade has been challenging for active management, current market conditions – marked by high concentration and elevated valuations – may create a more favourable environment for active strategies, consistent with historical trends.
Global equity valuations have continued to climb, with cyclically adjusted price-to-earnings ratios at the end of May reaching levels last seen during the dot-com bubble. While corporate earnings and forward forecasts are strong, equity prices are outstripping them as investors aggressively price in the revolutionary potential of AI. This speculative fervour is captured by SpaceX’s June IPO, which raised $85.7 billion at a $1.77 trillion valuation. Measured against its 2025 revenue of $18.7 billion, the company debuted at an astronomical price-to-sales multiple of roughly 96, underlining just how decoupled its valuation is from current fundamentals. The depth of investor interest will be tested further over the next 12 months, as peers OpenAI and Anthropic explore potential listings at near-$1 trillion valuations. Even if those listings come at lower multiples, all three businesses remain, for now, heavily loss-making.
In an increasingly expensive market, active equity funds may offer a way to reduce exposure to the most expensive and crowded parts of the market through more selective allocation to less richly valued areas. Earnings expectations and valuations both look stretched, and any reversal in either could create a meaningful challenge for medium-term returns. We’re currently cautious in our stance on equities, especially as geopolitical risks could reignite inflation, push up discount rates, and weigh on global growth and earnings. If valuations or earnings begin to mean revert over the medium term, active managers may face a more supportive backdrop than in recent years, particularly given their tendency to perform better in weaker markets.
Furthermore, passive funds have often been associated with broad diversification, while active funds have been seen as more concentrated. But that distinction is becoming harder to sustain as equity indices have become more concentrated. Geographic and sectoral concentration within global benchmarks has intensified dramatically. Over the past decade, North America’s allocation within global indices climbed from the low 60s to around 75%.
In our view, the choice between active and passive management shouldn’t be treated as binary. Passive strategies offer a simple, cost-effective way to capture market returns, while active management provides flexibility and the potential to generate alpha. Both approaches have distinct strengths: recent market performance highlights the benefits of passive investing while also bringing some of the associated risks into focus. Rather than choosing one, investors can use active and passive strategies together to build more balanced and resilient portfolios.
If you’d like to discuss any of the themes raised in this article, please get in touch.
Important information
This communication has been compiled by Hymans Robertson LLP® (HR) as a general information summary and is based on its understanding of events as at the date of publication, which may be subject to change. It is not to be relied upon for investment or financial decisions and is not a substitute for professional advice (including for legal, investment or tax advice) on specific circumstances.
HR accepts no liability for errors or omissions or reliance on any statement or opinion. Where we have relied upon data provided by third parties, reasonable care has been taken to assess its accuracy. However, we provide no guarantee and accept no liability in respect of any errors made by any third party.
General Investment Risk Warning
Please note the value of investments, and income from them, may fall as well as rise. This includes but is not limited to equities, government or corporate bonds, derivatives and property, whether held directly or in a pooled or collective investment vehicle. Further, investments in developing or emerging markets may be more volatile and less marketable than in mature markets. Exchange rates may also affect the value of investments. As a result, an investor may not get back the full amount of the original investment. Past performance is not necessarily a guide to future performance.
This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.
We pride ourselves on being thought leaders and are constantly discussing the many issues facing and shaping our industry. Sign up to find our current thinking on topical issues.
Opens in new window Subscribe
