Passive Investing Prevails Once More

The active vs passive investing debate has resurfaced again, following the release of the year-end 2024 SPIVA (S&P Indices Versus Active) report by S&P Global Ratings. And once again, the conclusion is unequivocal: passive investing remains the superior long-term strategy, both statistically and theoretically.

The Data Doesn’t Lie

According to SPIVA's latest findings:

• 65% of actively managed large-cap US equity funds underperformed the S&P 500 in 2024.

• Over a 20-year horizon, approximately 90% of US active equity funds failed to beat their benchmarks.

• Even in the small-cap segment—often cited as a fertile ground for alpha—only 11% of active funds outperformed over two decades.

• Similar patterns are observed across global developed markets, emerging markets, and bond funds.

These numbers are consistent with historical SPIVA data, reinforcing a persistent truth: alpha is elusive, and consistency even more so. A key point often overlooked is that managers who outperform in one year rarely replicate that success in the next. The empirical failure of active strategies is not an anomaly—it’s the norm.

The Active Manager’s Defence: AI and Concentration

Active managers argue this time is different. The dominant narrative is that the popularity of passive strategies has led to market distortions—specifically, an unhealthy concentration in the so-called “Magnificent 7” (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla). In 2024, these seven firms represented around 33% of the S&P 500’s market cap and accounted for over 50% of its 25% return.

But market concentration isn’t new. In the 1800s, it was banks. In the early 1900s, it was railroads. In the late 1990s, dot-coms. As Hendrik Bessembinder’s seminal study reveals, just 4% of US stocks have accounted for all net market wealth creation since 1926. The implication? Diversification via indexing ensures exposure to these critical few.

This statistical reality refutes the logic behind active bets. If outperformance relies on selecting rare outliers, missing even one is costly—and it’s far easier to miss them than to consistently find them.

Mispricing, Market Efficiency & the Role of Passive Flow

Another critique is that index investors “buy blindly,” regardless of fundamentals, thus creating inefficiencies and bubbles—most recently seen in the AI rally. Critics argue this could be fertile ground for active managers to outperform.

Yet historically, that hasn’t held. Post the 2000 dot-com crash, from 2001 to 2003, 65–75% of active managers underperformed annually, despite “valuation normalisation.” In other words, mispricings don’t guarantee outperformance—skill, timing, and discipline still matter, and few managers possess all three.

Moreover, even if 99% of investors became passive, the remaining 1% would be sufficient to keep prices aligned with fundamentals, as shown in efficient market hypotheses and academic literature.

MY OUTLOOK: A Core Indexed Allocation is Non-Negotiable

For most investors—and certainly for institutional portfolios—a core indexed allocation across asset classes is no longer optional; it’s essential. This does not negate the value of active strategies altogether. There’s still a role for alternative assets, private markets, tactical tilts, and alpha-seeking mandates, especially in private equity or credit. But within public equities, the data overwhelmingly suggests that chasing alpha via high-fee active mutual funds is, statistically, a losing game.

Fees, turnover, tax drag, behavioural biases—these all weigh against active strategies. Meanwhile, index funds offer:

• Low cost

• Diversification

• Tax efficiency

• Time-tested consistency

And perhaps most importantly: they’re boring. In a world ruled by narrative and noise, that’s a feature—not a bug.