Allocate with Intent: Active Equity Strategies for Changing Markets

For asset owners, the key question is where and how active strategies can be most effective.

Equity investors are facing monumental questions about their allocation strategies in a new market regime. Market concentration has risen sharply, valuations have climbed to record highs in parts of the market and factor volatility has dominated returns. These dynamics have challenged many active strategies, particularly in US and global large cap equities, and have shaken confidence among asset owners.

Yet, we think active management can help address these very challenges. Opportunities persist where dispersion is high, benchmarks are less concentrated and fundamental change is occurring beneath the surface. Even so, as technology and AI make information increasingly accessible, we believe active strategies must adapt their processes to deliver consistent relative performance.

The shift toward passive portfolios is understandable. At the same time, we believe that simplistic allocation decisions carry risks. So instead of making a binary choice between passive and active, we think asset owners should ask: where, how and under what conditions are active strategies most likely to deliver value? In other words, asset owners should reassess how they allocate active equity risk, broaden their opportunity set and lean into durable, differentiated investment processes.

Repackaging Risk: The Consequences of Concentration

Equity market concentration has become a defining feature for investors in the 2020s. In the US, a small group of AI-driven mega-cap stocks now dominates index weights, earnings growth and volatility. This concentration has reshaped the opportunity set for active managers in both US and global portfolios. Strong fundamental insights simply aren’t enough for equity portfolios to keep pace when index returns are driven primarily by a narrow subset of stocks, and as a result, most active managers in US large-cap equities have underperformed (Display).

Meanwhile, traditional return drivers like value, quality and momentum have become more episodic and unstable. Factor leadership has rotated faster, inflicting big penalties on portfolios that position incorrectly and making it harder for active strategies to compound excess returns consistently.

Passive portfolios are often seen as a panacea. They’re relatively inexpensive, transparent and offer alignment with highly concentrated benchmarks that have delivered strong headline returns.

But the shift to passive isn’t risk free. It typically leads to reduced diversification at the total portfolio level and increased exposure to single market, single theme risks. In other words, the shift to passive does not eliminate risk; it has repackaged it.

Where Do Markets Still Reward Selectivity? 

That distinction matters because headwinds to active management haven’t been uniform. In non-US equities, emerging markets and value oriented strategies, benchmarks are less concentrated and the breadth of returns has been meaningfully higher (Display).

Indeed, the median and top quartile active managers in non-US markets and emerging markets have delivered strong relative returns versus their benchmarks over one-, three- and five-year periods (Display). These segments have benefited from two structural tailwinds. First, earnings recoveries have been broader outside the US. Second, improving capital discipline has supported better shareholder returns in markets including Japan, South Korea and China. This provides fertile ground for active managers to identify businesses with attractive fundamentals and to capture diversifying sources of alpha.

For asset owners, this suggests that active risk is best deployed selectively, rather than evenly across equity allocations. We think investors should lean into active in markets that meaningfully reward skill with better portfolio outcomes.

Does that mean avoiding active for US and global equities, which are staple allocations for many asset owners? Not necessarily. There’s ample evidence that active investing strategies in US and global markets can deliver results over the long term and there are effective ways to access these markets for diverse risk appetites. In addition, periods of underperformance often revert to the mean and are followed by strong relative returns, as the recent rebound of value and emerging markets illustrates.

Applying Lessons on Risk Taking 

One of the clearest lessons of recent years is that how risk is taken matters as much as how much risk is taken. In concentrated markets, deviating from a benchmark—the hallmark of active investing—became fraught with risk. That’s why high-tracking error strategies haven’t consistently been rewarded, while more controlled approaches have often delivered more predictable outcomes.

As a result, asset owners should scrutinize active risk budgets more closely by asking the following questions:

• What’s my time horizon and risk tolerance?
• Does the source of active risk match my stated outcome objectives? 
• Have I allocated to distinctive outcomes and differentiated approaches?
• How have I adjusted the size of my allocation to reflect the range of risks to the outcomes?

The answers to these questions can help guide investors to the most appropriate strategies for their objectives.

Lower-tracking-error strategies with clear alpha objectives can provide resilience, especially in concentrated markets. Strategies like these can be valuable for investors with shorter time horizons, because they often deliver more consistent results when style and factor returns swing.

Higher-conviction strategies still have a role to play in allocations, particularly for investors with a higher risk tolerance and longer time horizon. It’s true that some portfolios with higher tracking error based on style-investing philosophies have struggled through concentrated markets. Yet, we think skilled managers are still capable of delivering alpha over time, as we’ve seen in the recent strong recovery of value equity strategies. That said, asset owners need to carefully consider how these types of strategies fit into their long-term allocations. Portfolio construction, risk management and a strategy’s ability to adapt will redefine future active success in a reshaped market landscape.

The Role of an Industrial System of Performance

This also points to a broader lesson for asset owners: in more complex markets, long-term success depends not just on conviction or style exposures, but on how consistently insights are translated into portfolio decisions. That puts greater emphasis on integrated investment systems—processes that combine research, risk management and portfolio construction in a disciplined, repeatable way.

1. Clearly defined standards for research excellence
Strong research requires clear points of view and explicit risk framing that should articulate what matters, why it matters and what would invalidate the thesis. And when benchmarks are dominated by a small number of stocks, underweights can be just as consequential as overweights. Effective risk management must treat both symmetrically.

2. Integration of fundamental, quantitative and AI enabled insights
Investment processes that are purely fundamental or purely quantitative may be too narrow. Quantitative tools can enhance risk control, signal validation and portfolio construction, while fundamental research provides context, judgment and conviction. AI is sharpening both dimensions by improving research efficiency and expanding analytical breadth.

3. Continuous improvement driven by data and decision analytics
Markets evolve and so must investment processes. Data driven evaluation of decisions, sizing and timing helps distinguish skill from noise and allows teams to learn systematically from outcomes across cycles.

For asset owners, assessing whether managers have institutionalized these capabilities is as important as reviewing recent performance. Robust systems increase the probability that performance can be repeated and adapted as market conditions change.

In today’s environment, asset owners should consider several guiding principles when allocating to active equities:

Active equities should serve as a portfolio tool, not a philosophical commitment. Their role is to improve risk adjusted outcomes, diversify sources of return and mitigate unintended concentrations created by passive allocations.

The future of active equities doesn’t belong to those with the loudest conviction or the most complex models. It belongs to investment systems that combine human judgment with analytical discipline, adapt to evolving markets and remain accountable to client outcomes. For asset owners, that means using active portfolios more intentionally. By focusing on where active has structural advantages, insisting on robust processes and aligning allocations with today’s market realities, asset owners will discover new ways for active equities to improve portfolio resilience over the long term.