Engaging with active investing – What does it involve today?
Active investing is no longer defined solely by stock selection, portfolio concentration or benchmark deviation. It increasingly encompasses how investment insights are accessed, combined and embedded within broader investment structures - and, crucially, why. Rather than simply asking where alpha comes from, professional investors' focus is now on how targeted, repeatable sources of alpha can be delivered in formats that align with their objectives, constraints, and governance frameworks.
This evolution reflects a more practical, outcome-oriented approach to portfolio design and implementation at all levels. Active risk is no longer consumed in isolation - it is expected to be delivered in ways which fulfil clear roles within wider investment architectures.
From exposure-led to outcome-oriented solutions
One of the clearest manifestations of this shift is the growing focus on objectives, rather than asset-class exposure labels. Investors are increasingly seeking to define their portfolios' risk and return profiles through strategies like income generation or defensive market participation.
Key drivers of this shift include rising longevity and the aging of populations. These are increasing demand for lifecycle planning solutions that emphasise specific outcomes, such as the ability to fund future liabilities. The proliferation of target-date pathway strategies, step-in solutions, and blended approaches that integrate public and private assets are a direct reflection of this trend. And, as only 45 per cent of Europeans feel confident about their retirement, we expect it to continue.
A more discerning approach to active risk
One might expect that a more outcome-orientated market would increase the demand for active solutions. However, long-term fundamental investors only drive around 15 per cent of US equity flows today, down from more than three quarters prior to the Global Financial Crisis. Meanwhile, equity research headcount at the world's 15 largest banks has fallen by around a third over the past decade.
These shifts reflect increased investor scepticism about active management, which is itself a function of many managers having failed to outperform their benchmarks consistently through the post-GFC era. Investors are rightly unwilling to pay for active risk that fails to deliver on its stated purpose, but the difficulty that professional investors have had in outperforming rising markets does not discredit the concept of active management entirely. Instead, returns should be contextualised; for example, a defensive strategy might be expected to lag when the absolute returns of its market are strong, but this does not mean that investors should extrapolate strong returns indefinitely.
Rather than being unwilling to pay for active risk, investors should seek to understand whether active risk is appropriate in context of their portfolio, objectives and the market backdrop. If so, they should ask what active risk should being taken and how it might be managed as circumstances evolve. On the other hand, they should have low tolerance for outcomes that are difficult to understand or explain, especially as regulatory value-for-money initiatives have placed greater emphasis on linking cost to outcomes. The era of opaque ‘black-box' alpha is therefore ebbing away in the face of increasing demand for clarity.
Building blocks with greater granularity
In this context, it is no surprise that active investing is becoming more modular. Modularity supports stronger transparency and governance, as it becomes easier to attribute outcomes to specific exposures when they are designed around explicit objectives and risk budgets. Portfolio construction, once largely implicit, has therefore become a more accountable component of the investment proposition, alongside investment and strategy selection.
In line with this, demand for portfolio building-block solutions is increasing, with investors expecting a larger range of options and greater granularity between them. They want exposures that map more precisely to objectives and constraints that they can define, whether these relate to climate considerations, factor or style budgets, risk limits, or otherwise.
This is reflected in the rapid proliferation of active ETFs we are witnessing - these are increasingly facilitating such granularity. They are now capturing over a third of total global ETF flows, despite representing less than a tenth of total ETF AUM. Indeed, in Europe, our own expanding range of research-powered active ETF solutions has been able to grow its AUM exponentially since launching in 2020, to around $10bn today.
The role of disciplined implementation
Alongside rising demand for greater granularity, investor appetite is growing for approaches that can combine research depth with disciplined portfolio construction in a bespoke manner. For many, systematic frameworks are reassuring as they offer repeatability, transparency, and explicit control of risk exposures, while research contributes judgement through top-down context and insight into bottom-up fundamentals.
This reflects investors' desire for precision. They want clarity around risk budgets, factor exposures and portfolio design, rather than granting broad discretion to a single portfolio manager. The expansion of systematic and hybrid approaches across the industry has accompanied this evolution, itself having been supported by improvements in the quality of data, technology and implementation processes. Within this, the success of our own systematic team has been predicated on its ability to provide clients with access our research team's proprietary insights in the exact manner they desire, through systematic strategies underpinned by award-winning portfolio construction and optimisation technologies.
From product-of-choice to wrapper agnosticism
In line with this more bespoke approach, the rise of wrapper agnosticism has been a key driver of today's more modular approach. Traditional active mutual funds, ETFs, bespoke segregated mandates, managed solutions and platform-delivered portfolios are now viewed as interchangeable vehicles for accessing the desired underlying sources of risk-adjusted returns. What matters is whether the underlying portfolio can reliably deliver the outcomes demanded and if it can be integrated into existing portfolio structures, reporting systems and governance models efficiently. For example, we recently conducted a survey of 125 institutional investors and intermediary distributors in Europe and Asia with Coalition Greenwich - outside financial performance and cost considerations, 42% said they use active ETFs to access specialist markets, 27% said they used them to meet sustainability goals, and 23% cited liquidity considerations.
For asset managers, the implication is clear - firms that can deliver their research across multiple formats can turn wrapper agnosticism into an advantage. Different wrappers can be used to implement and deliver insights in different ways, depending on what investors need to achieve in terms of real-world investment journeys, such as accumulation and decumulation.
Capabilities with purpose
Ultimately, the aim is clarity. Investors' needs are increasingly diverse, shaped by different objectives, regulatory environments, and governance considerations. Meanwhile, the economic backdrop has become more uncertain, making the investment process more complex. As a result, the ability to deliver active insights for specific purposes in ways that are auditable is now critical in sharpening investors' understanding and acceptance of what truly drives outcomes.
Forward-looking managers are evolving their capabilities accordingly. Our focus is on applying investment expertise across multiple dimensions, combining fundamental and systematic approaches where appropriate, and extending active insight beyond security selection into portfolio construction and implementation. This breadth of capability and ability to customise allows our clients to access our proprietary research insights in the manner which best aligns with their individual requirements.
The objective is not proliferation, but relevance. In today's environment, where outcomes are shaped by how exposures are combined as much as the insights that underpin them, the ability to deliver alpha in purpose-built solutions is becoming the defining feature of effective active management.
Important information
This is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. Past performance does not predict future returns. Returns may increase or decrease as a result of currency fluctuations. The value of investments and the income from them can go down as well as up so you may get back less than you invest. The value of investments in overseas markets can be affected by changes in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Key Investor Information Document (KIID) is available in English and can be obtained from our website at www.fidelityinternational.com. The Prospectus may also be obtained from Fidelity. Issued by FIL Pensions Management. Authorised and regulated by the Financial Conduct Authority. GCT260375EUR
