While passive strategies have gained popularity for good reason, there are still circumstances where active management is not only justified but necessary. However, getting to grips with exactly when and how to deploy active strategies can have a meaningful impact on both costs and long-term returns.
Passive as your default starting point
In most cases, particularly in equity markets, passive investing should be the default. It’s typically cheaper, easier to monitor, and has historically delivered strong results relative to many active peers. For charities with limited resources or limited time to monitor fund performance, passive strategies reduce complexity, risk, and cost.
The biggest headache with active investing lies not just in selecting a good manager, but in maintaining the discipline to monitor them, evaluating their strategy over time, and knowing when to walk away. Poor timing (entering after a run of outperformance or exiting during a downturn) can significantly erode any potential benefit from an active approach.
Where active management adds value
That said, there are asset classes and market conditions where active management has clear advantages.
In corporate bonds, for example, passive funds are often overweight in the most indebted issuers simply due to index construction, i.e. they buy bonds from those companies that issue the most debt. Skilled active managers can steer clear of such exposures and reposition quickly in response to changes in credit ratings, interest rate environments, or inflation expectations.
In multi-asset strategies, active managers may help take the emotion out of investing by rebalancing into growth assets following a crisis or shifting to protection assets in the face of macroeconomic stress. These dynamic moves, while not always visible in performance metrics, can provide smoother return profiles aligned to a charity’s long-term objectives.
Active management is also essential in areas like real estate and private markets, where passive options are either limited or unviable.
Costs and the danger of ‘pseudo-active’ strategies
We can all agree that cost does matter, but high fees are not always a red flag as long as they reflect genuine freedom and flexibility to pursue the manager’s best ideas. Problems arise when fees are high but the manager’s behaviour mimics that of an index fund. This “closet indexing” delivers passive-like performance at active prices, undermining value.
Another common mistake is using too many active managers. The result is often an expensive blend of funds that, when aggregated, behave much like a passive portfolio—only with significantly higher costs and oversight requirements.
Practical portfolio design: core and satellite
For many charity portfolios, a core-and-satellite approach may strike the right balance. Use low-cost passive funds as the backbone (especially for global equities) and selectively incorporate active funds where they can offer genuine diversification, can implement a specific view of the trustees, or navigate structural inefficiencies. Multi-asset and fixed income strategies are common candidates.
In one recent example, we helped a client reduce management fees by 50% without reducing their expected return. This was achieved by shifting from two expensive actively managed multi-asset funds to a combination of passive equity, active bonds, and a smaller allocation to a multi-asset fund. The new structure retained strategic flexibility but with significantly improved cost-efficiency.
Transparency and accountability matter
Regardless of strategy, trustees must demand transparency and hold managers accountable. With passive funds, the focus should be on implementation, tracking error, and cost. With active managers, it’s critical to ensure they continue to operate within their stated philosophy and mandate, while reporting the full costs incurred by the investors. Any deviation from either the original investment rationale or expected behaviour should prompt a review.
Final thoughts
Active fund management is neither good nor bad in itself, it’s a tool. Used well, it can enhance outcomes and reduce risk. Used poorly, it can create unnecessary cost and complexity.
Charity leaders should understand when active management is beneficial, when it isn't, and how it fits within the broader goals of the investment strategy. Avoid the temptation to chase performance, and instead focus on philosophy, structure, and alignment with long-term objectives.
In some cases, active management is necessary. However, care must always be taken to ensure you’re not paying over the odds for results you could achieve more efficiently elsewhere.
If you would like to discuss any of these matters further, please get in touch with your usual contact at Cartwright.
