Article last updated 8 June 2026.
Passive investing is frequently pushed as the safest and most neutral approach to the markets. In reality, it’s neither.
Passive funds don’t evaluate a company's fundamental value, resilience, or underlying quality. Instead, they operate mechanically, buying more of what has already grown large and selling what has fallen from favour. By design, this is inherently backward-looking, locking investors into yesterday’s winners just as market cycles turn. This can be doubly damaging when coupled with model portfolio services (MPS) that use index trackers and infrequent, mechanical rebalancing. If you can’t react immediately when markets turn, and you’re forced to hold the bag all the way down the hole, it gets messy.
History shows the danger of assuming current market leaders will maintain their dominance. Between 1999 and 2026, the landscape shifted radically. In 1999, the market was consumed by dotcom euphoria, elevating tech companies to massive valuations based on hope rather than earnings. Virtually all those companies are no longer in the top 10. Many no longer exist.
Fast forward to 2026, and we’re in an era defined by AI. Spurred by explosive investment in data centres and computing power, companies like Nvidia surged – the ‘Magnificent Seven’ have come to account for roughly one-third of the S&P 500.
This journey through time highlights a critical vulnerability for passive investors: extreme concentration risk. Today, indices are more top-heavy than ever. A supposedly diversified passive portfolio is essentially a massive bet on a handful of interconnected mega-cap technology firms. Because these businesses rely on the same ecosystems and suppliers, stress in one area could easily cascade into a broader industry shock.
We’ve seen the dangers of index concentration before. In 1989, at the height of Japan’s stock market boom, it accounted for 45% of the MSCI World Index. Today, it’s 5.5% – the same weighting as Nvidia. An investor passively tracking the MSCI World would have taken a big hit in the early 1990s bust and been slow to capitalise on the rise of the US.
Structural mechanics of increasingly dominant passive investment flows introduce hidden risks. Massive flows into passive funds disproportionately inflate the share prices of the largest companies, regardless of changes in company fundamentals. This creates a dangerous feedback loop that exacerbates vulnerabilities when trends reverse. This weakness is even more pronounced in fixed-income markets. Because bond indices are weighted by outstanding debt, passive investors are systematically forced to lend the most money to the biggest borrowers.
Active investing offers a fundamentally different starting point by focusing on the intrinsic value of what is owned. A prime example occurred in 2022, when our multi-asset team proactively removed almost all duration from our lower-risk funds ahead of aggressive central bank tightening. This active management shielded our investors from the severe bond market drawdowns that passive alternatives sleepwalked into. While passive funds remain useful tools, an increasingly volatile world requires an active approach, one that looks forward and adapts to shifting conditions, ultimately investing with conviction rather than relying on autopilot.
Speak to our team to understand how we actively manage MPS portfolios in today's evolving market environment.
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