Market volatility and geopolitical uncertainty have renewed discussions about investing decisions and how institutional allocators should incorporate active or passive strategies.
Research shows that passive strategies often beat active strategies, notably in U.S. large-cap equity markets, because of their high transparency and efficiency. In the decade through 2025, only 10% of active managers beat their passive indexes, according to Morningstar. Active managers can be more successful in less-efficient markets, such as emerging markets, the company’s research shows.
Apurva Schwartz, a portfolio specialist at Harding Loevner L.P., a long-only active manager, says the remainder of 2026 might offer a better environment for active management in equities, as there is greater dispersion of returns, and correlations are lower. Fundamentals matter more, too, she says.
“In the last several years, macroeconomic liquidity and narrow leadership [from a few mega-cap tech companies] have overwhelmed fundamentals, so you have not seen active managers do quite as well,” Schwartz says.
Making strategy changes is a nuanced decision for institutional investors. It is not based just on asset class and opportunity, but on where and how specific investment goals are made and implemented, according to researchers and investors.
Large-Scale Changes Remain Unlikely
Institutional investors that have heavy allocations to passive strategies are unlikely to make large changes to their portfolios just because markets may offer greater dispersion and mispricing opportunities, says Mark Stahl, manager of global manager research at investment consultant Callan. At most, allocators may make marginal changes.
“When you think about active/passive with a lot of institutional clients, it’s kind of a long-term strategic decision,” Stahl says.
That is how Ben Cotton, CIO of the $81.5 billion Pennsylvania Public School Employees’ Retirement Systems, approaches the pension fund’s portfolio allocation.
“I’m not a big fan of short- or intermediate-market timing, and that would include timing elements like when to be more active or more passive,” Cotton wrote to CIO to answer questions. “We view that as a longer-term decision that takes shape over time as our conviction in certain investment managers or strategies increases or decreases.”
PennPSERS’ pension portfolio is split approximately 53.5% to active strategies and 46.5% to passive strategies, and it includes allocations to equity, fixed income, real assets, opportunistic and cash.
When investment staff members consider strategies, Cotton says they run a cost-benefit analysis based on relative market efficiency, as well as their relative confidence in managers’ ability to outperform. For the remainder of 2026, Cotton says PSERS will stay the course.
“There is a lot more noise and uncertainty in the market more recently,” Cotton wrote. “Perhaps counterintuitively, that really leads us to have less certainty in our views. When we are less certain, we’re more likely to manage closer to our allocation targets. It doesn’t really change the active-passive split so much.”
Weighing Opportunities for Alpha
Jan-Carl Plagge, global head of indexing, active and ESG research at Vanguard, says greater dispersion does not necessarily equate to active manager outperformance. Investing is still a zero-sum game of winners and losers.
“I think what is often still misunderstood is that there might be a directional relationship between dispersion and the likelihood to outperform the market in aggregates, and that isn’t the case … regardless of whether or not we’re in a high- or low-dispersion environment,” Plagge says.
Although Vanguard is best known for its passive strategies, it has many active strategies, particularly in bonds. Plagge says the firm uses a four-category framework for its multi-asset portfolios, which contain a mix of different asset classes in different regions, with different exposures to active and passive. The decision to take an active, rather than passive, approach comes down to the investors’ gross alpha expectation, costs basis, the level of active risk and the investor’s active-risk tolerance.
Plagge also differentiates between passive investing and index investing. Index funds that replicate the entire market are passive investments, but not all index funds are passive, he stresses, citing sector, industry and smart-beta funds as examples of active indexing because of their narrower approach. Investors may also use indexed funds tactically.
Gene Podkaminer, an institutional investment strategist at the Capital Group, concurs, saying from an informational perspective, one can argue that moving away from a simple market-capitalization weighted index is an active decision.
“It’s best to have your eyes wide open and be very explicit about that, versus implicitly thinking that [indexing is] more passive when actually it may not be,” he says.
Where Investment Decisions Are Made
Podkaminer says active and passive strategies are two ways to express risk along a continuum. Which ones to use in what circumstances depend on the asset owner, the portfolio objectives and who makes the decisions.
“I love the question [whether allocators should use active or passive strategies], because it’s actually a very deep inquiry into the way that risk is spent, into the way that we think about what an asset class is or is not, and also into the way that decisions come down exogenously, depending on [where] they’re made,” Podkaminer says.
Before investors choose active or passive strategies, he continues, they first should define what they consider an asset class.
“Figuring how you define an asset class—or how you define a performance metric—shows you what the embedded active decisions are within that,” Podkaminer says.
He prefers to define asset classes as equities, fixed-income and real assets, because those categories allow for a more meaningful discussion of where and how to spend risk, rather than using narrower definitions, such as large-cap equity or emerging-market debt.
Podkaminer says the current debate regarding active or passive is tied to ongoing discussions within the industry over the decision to pursue a more investment-prescriptive strategic asset allocation approach or a total portfolio approach in which the board designates a reference portfolio and the CIO works within a risk budget.
Still, he says, even strategic asset allocation approaches can be active, such as a board of directors clearly defining to the investment team how much to allocate to U.S. and international equities.
“Already, right there, you’ve made an active decision, even if you implement passively,” he says.
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Tags: Active Investing, active vs. passive, geopolitical risk, market volatility, passive investing