The age-old debate of active versus passive investing is a frequent topic in our client discussions. The pursuit of compensated risks within investment allocations requires an intentional decision on when – and how – to utilize active, passive or engineered investment management strategies.
In our view, expertly combining the broad market exposure of passive strategies, the precision of engineered portfolios, and the dynamic opportunities of active management allows us to deliver sophisticated solutions designed to optimize growth, minimize taxes and expenses, all while managing risk more effectively. This approach redirects the focus to compensated forms of risk, ensuring that every client’s portfolio aligns with their unique financial goals. The blend of passive, engineered, and active strategies also creates personalized, high-performing portfolios for clients.
In this post, we’ll dive into how we integrate these three strategies into a customized framework, delivering smarter, more resilient investment outcomes.
With active investing, managers aim to outperform the market through stock picking or market timing. It’s best suited for niche opportunities where inefficiencies are more likely to exist, and it requires careful oversight to ensure costs don’t outweigh returns.
Yes, it is true that the majority of active mutual funds and exchange-traded funds (ETFs) have fallen short of their benchmarks over time. According to a recent survey of active funds in the industry, only 27% outperformed over a 10-year period, 23% over 15 years and a stunning 17% outperformed their respective benchmarks over a 20-year period ending December 31, 2024. In fact, many of these funds don’t even survive long enough to be measured at 10-, 15- and 20-year intervals1.
In our view, active management can add value in certain situations, such as fixed income assets, with an eye towards generating total returns across sectors, maturities and credit types. If managers are not meeting the stated targets or if strategies and scenarios change that no longer warrant their inclusion, we don’t hesitate to replace them.
Pros: Potential for outsized gains, more flexibility, customization
Cons: Higher costs, lower consistency, increased risk
When advisors use a passive investing philosophy, they’re essentially aiming to match market performance through low-cost index funds or ETFs. It provides a strong foundation for broad market exposure, and it often serves as a complement to more tailored strategies. By definition, an index fund serves to replicate and not outperform its respective index.
Pros: Lower costs, simplicity, consistency
Cons: Exposure to all market risks, compensated and uncompensated, lack of flexibility, missed niche opportunities
Using engineered portfolios, advisors tap into research-backed strategies to create portfolios for optimal efficiency. Engineered strategies combine the cost benefits of passive investing with the strategic tilt of active decision-making, delivering a disciplined, evidence-based method. These factor-based tilts allow investors to customize their approach by leaning into quality, momentum, size and value characteristics. Public equity markets are highly efficient, making outperformance unlikely. Customized index solutions provide outperformance to these markets via systematic diversification and daily tax management.
Pros: Focus on compensated risks like value, size, quality and profitability; integrates tax efficiency and other advanced strategies tailored to the investor; precision and scalability
Cons: Complexity of owning individual shares instead of only mutual funds and ETFs.
When we design portfolios, we prioritize balancing risk and return by diversifying with a unique mix of investment strategies. A key part of this approach is understanding the difference between compensated and uncompensated risks. Compensated risks, such as those associated with small-cap or value stocks, are the types of risks that historically provide higher returns over time. Compensated risks can also be found in select direct alternative investment strategies offering skill and illiquidity premiums. In contrast, uncompensated risks — random, idiosyncratic risks that lack strategic value — don’t contribute to additional returns and can unnecessarily increase portfolio volatility.
By focusing on efficient portfolio design, we emphasize risks that investors are rewarded for while actively working to minimize uncompensated risks. This process is guided by our careful analysis, expertise, and commitment to creating portfolios that align with each client’s financial goals.
We believe that every client deserves a portfolio tailored to their unique risk tolerance and financial goals. We integrate multiple investment perspectives and solutions to ensure objectivity and balance. Relying on the perspective of a single financial institution – particularly one with its own products – can introduce bias, so we draw from diverse sources to develop a well-rounded understanding of the economy, markets, and investment opportunities. This philosophy allows us to design portfolios that are not only personalized but also grounded in a broader, more comprehensive view.
We achieve this by combining elements of active, passive, and engineered strategies to create customized portfolio designs. Using advanced tools and technology, we leverage data to engineer portfolios that are precisely aligned with each client’s goals.
For highly taxable clients, tax management is critical. This is why we integrate tax-efficient strategies like screening daily for tax-loss harvesting opportunities and thoughtfully optimizing asset location. By incorporating a sophisticated tax management overlay, we can minimize the negative impact of taxes, preserving more of our clients’ wealth and ensuring their portfolios remain as efficient as possible.
Active, passive, and engineered investment strategies each play a vital role in building efficient portfolios. Engineered portfolios, in particular, provide a sophisticated balance between cost, efficiency, and compensated risk, making them a key component of our approach.
We are committed to creating strategies that grow wealth while respecting the complexities of our clients’ financial lives and would love to share more about our philosophy of portfolio management — whether over a cup of coffee or a bite to eat. Let’s chat!
1 US-domiciled, USD-denominated open-end and exchange-traded fund data is provided by Morningstar. Index funds, load-waived funds, and fund of funds are excluded from the industry sample.
