The Vanguard S&P 500 fund is the first ever passive investment fund to hit one trillion dollars under management.  The legendary investor Jack Bogle revolutionised personal investing with the creation of the Vanguard Group, providing access to the markets for millions at very low cost.

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But it’s important to understand that passives seek to track an index rather than identify mispriced securities. This is the job of active managers who attempt to outperform the market through research and analysis. Active managers therefore contribute to “price discovery” which helps to establish market prices. Passives simply accept these prices and allocate capital according to where a company stands based on its size. Without active investors, there would be no mechanism to determine what a company is worth.

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Of course it works both ways. Passive funds provide liquidity and momentum when everyone jumps in, which in turn creates a benchmark for active managers to compete against.

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Bogle himself said that if everybody indexed, it would cause chaos and markets would fail because without active trading, based on information and judgment, the process of price discovery would weaken and markets would become less efficient. Index investors are essentially price takers, whilst active investors are price makers.

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The debate is often around the majority of managers being unable to outperform an index, so are they worth it? Well on that statement, most means not all, so some must be outperforming. This outperformance argument only matters if the objective is to maximise risk adjusted returns, but many investors have very different objectives. Many want a stable income stream protected against inflation, capital preservation and reduced exposure to large market corrections. In this case beating the FTSE All-Share or S&P 500 may be a secondary consideration.

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Diversification also matters. Creating a suitable portfolio for clients is not just about holding multiple funds; it’s about owning investments that respond differently to economic and market conditions. If every fund in a portfolio did well at the same time, we may not have achieved true diversification. Can one expect both Value and Growth companies to move in lock-step? The purpose of diversification is not to expect to maximise returns in every market environment, but to reduce the impact of any single risk factor and create a smoother investment journey over the longer term.  

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That said, at EXE Capital we know ultimately that performance matters so be assured, we won’t be resting on our laurels.

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PS. The prospect of several large technology IPOs coming to the market, (SpaceX, OpenAI, Anthropic), is that once a company enters an index, those index funds must own it for better or worse. Investor enthusiasm drives strong demand and potentially elevated valuations. Often, passive investors become buyers after much of the initial price appreciation has already occurred.  The current concentration risk around just a few companies in the S&P 500 will only worsen. Active managers can avoid overinvesting in these areas or take advantage should prices fall if expectations of lofty valuations do not materialise.

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Alongside Investment Management,  we offer a comprehensive range of complimentary services to support our client’s broader financial objectives.  Click her to view.

Comments from James Scott-Hopkins, Founder, EXE Capital Management.

The views are those of the author only.

The above does not constitute a recommendation to buy certain assets and advice should be sought from your financial advisor as to the appropriateness of any holding in your portfolio. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

Discretionary Portfolio Management and Financial Planning for Families and Entrepreneurs.

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