Alfred Slager

Professor of Institutional Investment, Vrije Universiteit Amsterdam

‘The more complex the index, the greater the chance of unexpected consequences’

To what extent can passive strategies adequately respond to sustainability and social impact?

‘Wouldn't it be better to ask how passive strategies should respond to this? It is positive that passive strategies not only look at the most important financial characteristics, but also increasingly at how companies deal with sustainability developments. At the same time, more and more criteria are being incorporated into the composition of indices. Such an index now has to be at home in all markets. In doing so, we may be asking too much of passive strategies. The more complex the index, the greater the chance of unexpected consequences. If social impact is the goal, private investments are often a better fit. In that domain, the discussion between active and passive is also less relevant.’

Does the WTP influence the choice between active and passive investing?

‘I don't have a strong opinion on that. I would find it remarkable if pension boards suddenly saw all kinds of new active investment opportunities that weren't there before because of the WTP. The question then is why those opportunities weren't exploited before. Simply pointing to the VEV restriction seems to me to be a somewhat limited answer. Conversely, pension boards that are going to invest more passively as a result of the WTP are not doing so because they have suddenly come to the conclusion that active investing is not right for them. Rather, it is because they want to devote more time and attention to IT systems, communication or other matters following the introduction of the WTP. By investing more passively, they create space in their “governance budget” to focus on these areas.

Effi Bialkowski

Senior Portfolio Manager, Van Lanschot Kempen

'Sustainability integration in passive strategies has limitations.'

To what extent can passive strategies adequately address sustainability and social impact?

Passive strategies can certainly address sustainability, particularly through exclusions and ESG tilting. Examples include exclusions based on business activities, sustainability scores, greenhouse gas emissions or violations of standards. More sustainable activities within an index can also be given greater weight.

We see varying degrees of sustainability integration in passive strategies. Some index solutions limit themselves to excluding the most controversial business activities and/or violations of standards, while others apply a broader set of criteria, combined with a tilting mechanism towards a positive contribution to the SDGs.

However, sustainability integration in passive strategies also has limitations. For example, the data used by index providers is often largely retrospective and not always completely undisputed. For maximum social impact and additional value creation, an active or hybrid approach often remains the best choice.

How passive are indices today?

‘We prefer to talk about indexing. After all, even the most ‘passive’ indices have active elements. The choices made in index composition, ESG integration, sector weightings and replication methods mean that passive strategies often contain active elements. The choice of a particular region or sector is also an active choice that can have much more impact than the choice to actively track an index. The term “passive” therefore refers primarily to the implementation, not to the policy choices that precede it.'

'Being active in both asset allocation and fund selection often leads to friction.'

To what extent are passive strategies appropriate in a volatile and inflation-sensitive market?

‘In the debate about active versus passive investing, it is worth first looking at the playing field. To clearly distinguish the possible choices, the components of asset allocation and fund selection are placed in a quadrant below. There are four possible combinations of asset allocation and fund selection: active allocation and actively managed funds, active allocation with passive funds, passive allocation with active funds and passive allocation with passive funds. Each approach requires different skills – and above all, a clear vision of where you add value as an organisation.

Being active in both areas (#1) – allocation and fund selection – sounds attractive, but often leads to friction. Consider a good asset allocation decision, where the selected active funds still underperform. With actively managed funds, a longer investment horizon is crucial, but this is difficult to reconcile with regular changes in allocation. You cannot be both a goalkeeper and a striker. Focus is crucial.

At the same time, passive allocation + passive management (#4) is very relaxed: the allocation is fixed and you rely entirely on what the indices offer – including concentration risks, weightings based on market capitalisation and sector biases. However, this approach may overlook the question of whether certain asset classes can still deliver sufficient returns (e.g. in the event of very low interest rates or high valuations) and whether concentration risks are not becoming too great with the market cap approach. It is like automatically selecting a football team without analysing the opponent and without checking who is fit.

That is why combination strategies are often used in practice:

• Active asset allocation with passive implementation via ETFs (#2) – tactically responding to macro themes such as inflation, geopolitics or interest rates, without being dependent on individual fund managers.

• Or passive allocation with active selection (#3) – long-term portfolios built around carefully selected funds.

If, as an investor, you want to respond to market volatility and the theme of inflation, steering at the allocation level is often more effective than focusing on fund selection. This argues in favour of strategy #2. But the key question you always have to ask yourself is: where do my skills lie? Know what you and your team are good at, know the rules of the game, make your choices – and don't try to do everything at once.

Rishma Moennasing

Hoofd Beleggingsfondsen en Mandaten, Rabobank Investment Office

'There is growing demand for equal weight indices..'

To what extent are passive strategies appropriate in a volatile, inflation-sensitive or geopolitically turbulent market?

‘In general, in large, efficient markets, such as a global investment, we either opt for exposure to a large market, such as the US or Europe, or for a passive investment. It is generally more difficult for an active manager to beat the index in these efficient markets. In these unusual market conditions, a passive approach can work well in combination with active management. An active manager can, for example, assess at company level whether President Trump's import tariffs are affecting a company's activities and results and adjust his fund accordingly. Active management can therefore certainly add value in this market.

How passive are indices these days?

‘A few trends are noticeable. There is growing demand for equal weight indices to reduce the impact of bubbles, such as the tech bubble with the Magnificent 7, on the performance and volatility of an index. There is also greater demand for indices that invest exclusively outside the US. This is entirely due to geopolitical sentiment, with investors opting to underweight the US or exit US equities altogether and invest in Europe. Interest in indices with European equities, and in particular in the region or a country index such as the DAX, is therefore increasing. There is also greater demand for indices that invest in specific themes in Europe, such as innovation, defence and the production of capital goods, semiconductors or cloud services. The latter segment in particular is still dominated by US tech companies. Perhaps belatedly, but Europe seems to have realised that we have become too dependent on the US for certain core activities. In that respect, President Trump has certainly shaken Europe awake.

Marc van Maarle

Senior Institutioneel Vermogensbeheerder, Index People

'Risk diversification is the only “free lunch” in investing.'

How should you deal with concentration risks in passive portfolios?

‘Risk diversification is the only free lunch in investing. For our organisation, a high degree of diversification is necessary to mitigate concentration risks. This applies not only to individual equities, but also to regions and (sub-)asset classes. That is why the passive preference proposition for our clients is based on a regional distribution of equity investments based on the distribution of global GDP as published by the IMF. The automatic consequence of this is that America accounts for approximately 35%, while a larger allocation to emerging countries and Europe is the logical consequence. We also add small-cap equities to achieve further diversification.

To what extent are passive strategies appropriate in a volatile, inflation-sensitive or geopolitically turbulent market?

‘We structure passive client portfolios based on risk appetite combined with the client's investment horizon. Not only are the investment solutions used passively managed, but the policy is also passive. Risk profiles are monitored based on rules-based rebalancing of client portfolios, excluding emotions and expectations. Since we cannot predict financial markets, our sole objective is to keep investment portfolios in line with clients' desired risk profiles. An additional advantage of this approach is that it requires profit-taking when there are significant increases and additional purchases when there are declines.'

Wim Zwanenburg

Beleggingsstrateeg, Stroeve & Lemberger

''Passive’ is not the same as standing by and watching.'

To what extent are passive strategies appropriate in a volatile, inflation-sensitive or geopolitically turbulent market?

Passive strategies prevent you from overreacting to market turbulence and geopolitical uncertainty. You remain invested in the market, rather than making emotionally driven buying or selling decisions. With passive funds that track broad indices, you are automatically well diversified across sectors, regions and companies. This mitigates individual risks. In a market where volatility has increased, for example due to Trump's protectionist trade policy and uncertainty about import tariffs, logistics chains and inflation, the risk of selection errors by active managers is greater. If you do opt for actively managed funds – which may also include active ETFs – choose fund managers who are true to their convictions and have a low portfolio turnover rate. In other words, be passive, which is not the same as passively standing by and watching.

How should you deal with concentration risks in passive portfolios?

Many index funds, as market-weighted passive funds, are heavily weighted in growth stocks (such as technology), which are more sensitive to interest rate rises due to inflation. After the excellent investment results of the Magnificent 7, their weight and concentration had increased significantly by the end of 2024. In the event of geopolitical shocks and a sudden shift in regional selection preferences, as in the first months of 2025, there is also greater sensitivity to profit-taking. A choice for “equally weighted” passive funds would then be obvious. However, the tide can turn quickly. The good investment results of many technology stocks were not only due to higher valuations, but also to strong profit growth and margin improvement. Service companies and software suppliers are less affected by import duties.

Conclusion

Our discussions with six experts show that the distinction between active and passive investing is by no means black and white. Passive strategies are becoming more sophisticated and increasingly able to integrate sustainability criteria. However, there is a limit to their effectiveness in terms of sustainable impact. This is precisely where active approaches remain attractive, especially in the private assets domain. In turbulent markets, passive strategies offer stability, discipline and broad diversification. They prove their worth particularly in efficient markets, but ‘active’ strategies can help to respond to specific risks or opportunities. Active asset allocation in combination with passive funds appears to be a particularly powerful approach, provided it is implemented with vision and focus.

It is also striking that indices themselves are becoming less and less “passive”. In practice, passive investing requires active choices. “Passive” mainly relates to the execution, not the strategic choices that precede it. Our experts recognise the increased concentration risks in market capitalisation-weighted indices. These can be limited through equally weighted strategies, broader diversification across regions and themes, or a different approach. It should be clear that passive and active are not opposites, but complementary building blocks. Success lies in focus, clear choices and the deployment of the right expertise.