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Not all passives are created equal

Date: 11 September 2025

5 minute read

Around 50 years ago, a man called John 'Jack' Bogle came up with a new investment concept. He introduced the idea of the tracker fund – a cheap investment fund that replicated a broad index of shares. His argument was that markets are efficient, and investment managers were trying to outperform a market over which they had no information advantage.

Image showing stock market price movement

He created a firm called Vanguard to build and market these tracker funds directly to the public. Dubbed 'The Vanguard Experiment', the concept initially flopped. Promising only to match what the broader market index achieved was not thought to be very enticing and was denigrated by critics as 'a sure path to mediocrity' and, even, 'un-American'. Today, the story is somewhat different. In the US, assets in passive mutual funds and ETFs have surpassed those in active funds and Vanguard is the second largest asset manager in the world.

Whilst the first tracker funds simply tracked US stock market performance, the market has evolved to offer multi-asset passive investments offering exposure to a wide variety of asset classes. However, multi-asset passive investing is a lot more complex than tracking a single index.

Being actively passive

The construction of a multi-asset passive investment involves a series of decisions, and because there are a variety of ways to approach each area, these are active decisions. As an asset manager, and as a financial adviser, it is important to understand what each of these are, and their potential implications.

The first decision is what assets to include. Equities perform very differently in different regions – take developed and emerging markets as an example. And, unless an investor has a high-risk appetite, a pure equity approach is unlikely to be suitable. So, other areas are normally considered, such as fixed income. This can be government debt, corporate debt, or both, and can then be divided into different regions, maturities, credit ratings, etc. Another area to consider is alternatives like commodities or property. These can provide valuable diversification but can be hard to access via passive instruments.

The next decision is how to track the chosen assets. Passive investing is not as simple as it was in Jack’s day, as there are now over 100,000 funds to choose from. These include market-cap weighted, equally weighted, sector specific, and even so called 'smart beta' investments. Each of these has their merits. For example, say you wish to invest in the US stock market, but you are concerned about the high exposure of the index to the AI-themed 'Magnificent Seven'. An equal-weighted tracker, where every stock has an exposure of 0.2%, could be an answer. The outcome of investing in this way will be vastly different – even though you are investing in the same underlying companies. So, the decision as to 'how' to track an asset class can be as important as 'what' to track.

Understanding the differences

Once the 'what' and the 'how' are answered, the next question is how different asset classes are combined i.e. what is the asset allocation? Again, there are a variety of approaches. Some multi-asset passives follow a fixed allocation – for example 60% equity and 40% bond. This is simple and easy to explain. However, in years like 2022, holding a high proportion of fixed income was damaging to cautious investors, and this fixed approach slavishly follows its asset allocation regardless of whether it is appropriate or not. Other processes consider current market values and economic indicators and aim to create a forward-looking asset allocation. This is not without complexity, but it can manage the pitfalls of overpriced assets better than a fixed asset allocation.

The last area to consider is whether there should be a rebalancing process, and if so, how often. Answers to this vary from 'never' to 'daily'. The more infrequently portfolios are rebalanced, the greater the chances of drift in terms of risk – which may be inappropriate for your advice process. Conversely, a higher frequency can lead to increased trading costs. However, even then, the word ‘rebalance’ can mean different things. In some cases, it will mean resetting back to the last rebalance. In others, it will mean considering new inputs from time to time and updating to follow these. Again, this discipline will have a significant effect on investment returns over time, so it is worth fully exploring.

The chart below shows a multi-asset passive fund (Fund D) that sits in the IA Mixed 20-60% Shares sector. The fund follows a fixed asset allocation, with 40% in equities and 60% in fixed income and rebalances to this on a daily basis. The chart also shows the WealthSelect Managed Passive 5 Portfolio and the Cirilium Passive Balanced Fund, which use a forward-looking asset allocation process that combines the potential returns of asset classes with their volatility and correlation to create an appropriate asset allocation. As you can see the outcomes of the different approaches can be quite different.


Return since launch of WealthSelect Managed Passive 5 vs peers

Graph showing the return of WealthSelect Managed Passive 5 versus its peers

Past performance is not a guide to future performance and may not be repeated.
Source: Quilter and FactSet as at 31 July 2025. Total return, percentage growth (rebased to 100) over period 8 March 2022 to 31 July 2025. All performance figures are net of underlying fund charges, but gross of the Managed Portfolio Service charge. Deduction of this charge will impact on the performance shown. The WealthSelect Managed Passive 5 Portfolio launched on 8 March 2022.


Making the right choice

So, a multi-asset passive fund may passively follow a defined set of rules, but the decisions taken to create the rules are active – as is the decision of advisers as to which multi-asset passive fund to use. If you are considering using a multi-asset passive fund it is worth understanding exactly how it operates in each of these areas, as it will have a highly significant effect on the investment outcomes for your clients. Not all passives are created equal.

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