For years, the investment world has framed things as a simple choice: active vs passive investing. One camp aims to outperform the market through expert fund selection. The other seeks to track the market as efficiently and cheaply as possible.
But the industry has evolved. Today, many portfolios combine both approaches, leading to the rise of blended investing.
For advisers, the conversation increasingly centres less on which camp is “right”, and more on how different strategies can work together within a broader asset allocation strategy. Asset allocation plays a significant role in long-term investment outcomes, which is why we take an active approach to it across our investment solutions.
From there, advisers can choose the building blocks that best suit their clients. Active, passive, or a combination of both.
What is active investing?
Active investing involves fund managers selecting investments with the goal of outperforming the wider market.
Rather than following an index, active managers research companies, analyse valuations and make portfolio decisions based on their view of opportunities and risks.
Key characteristics of active investing include:
- Performance potential: Managers aim to beat the market by identifying investments with strong fundamentals or attractive valuations
- Higher involvement: Portfolios are regularly monitored and adjusted as opportunities arise
- Costs: Active funds typically carry higher charges due to research, analysis and trading activity
Active investing can offer the potential for above market returns. However, this is not guaranteed, and periods of underperformance can occur.
You can learn more about our approach to active strategies here: Active Investing.
What is passive investing?
Passive investing takes a different approach. Instead of selecting individual securities, passive funds aim to track the performance of a specific market index.
For example, a passive fund might replicate the holdings of the S&P 500, meaning its performance broadly mirrors that index before costs.
Key characteristics include:
- Index tracking: Funds follow a predefined benchmark
- Lower costs: Rules based management reduces research and trading expenses
- Market matching performance: Returns typically move in line with the broader market
Because of their structure, passive funds are often used as cost efficient building blocks within diversified portfolios.
Find out more about our passive investment solutions here: Passive Investing.
What is blended investing?
Blended investing combines both active and passive approaches within a single portfolio.
Rather than viewing the two strategies as competing ideas, blended investing uses each where it can add value. Passive funds can help manage costs and provide broad market exposure, while active funds may offer opportunities to outperform in specific areas.
A blended investment strategy typically involves:
- Active asset allocation across regions and asset classes
- Selective use of active funds where manager skill may add value
- Passive building blocks to provide efficient market exposure
This hybrid approach aims to balance performance potential, diversification and cost efficiency.
Blended investing can be particularly useful when markets are evolving or becoming concentrated, as it allows portfolio construction to remain flexible.
Active vs passive vs blended - key differences
| Style | Active investing | Passive investing | Blended investing |
|---|---|---|---|
| Investment approach | Fund managers actively select investments, aiming to outperform the market. | Tracks a specific index (e.g. S&P 500), aiming to match market performance before costs. | Combines both active and passive strategies to balance performance, risk and cost. |
| Costs and charges | Higher, due to management fees, research, analysis and trading costs. | Lower, thanks to a rules based management and fewer resource based costs. | Competitive, varying on the active and passive allocation. |
| Objective | Aim to beat the market through selecting assets which have better fundamentals or valuations. | Match market performance and volatility. Momentum-oriented, with no focus on valuations or company fundamentals. | Optimise return and cost-efficiency using both active and passive strategies, depending on market conditions. |
| Involvement & management style | Hands-on with frequent monitoring and trading. | Hands-off with longterm holding with minimal trading. | Balanced, some parts actively managed, others not. |
| Risk and performance | Potential for above market returns, though not guaranteed, and there is the potential for underperformance. | Performance and risk move in line with the market. | Diversifies risk across active and passive, therefore has elements of both strategies. |
| Values-based investing? | Fund specific mandates designed to meet the ethical values and preferences of the investor. Active managers choose which assets to hold, based on the criteria. | Passive ESG funds track a defined ESG index. A rules based approach tends to lead to exclusions making them less tailored to client values than active ESG funds. | Aims to blend both components in order to manage costs and performance. |
Which investment strategy is best?
Rather than a single “best” approach, different strategies can support different portfolio objectives.
For long term growth
Active investing may appeal where the aim is to identify opportunities for outperformance, particularly in areas of the market where manager skill can play a role.
For cost conscious investors
Passive investing offers a straightforward and cost-efficient way to access broad market exposure.
For risk managed portfolios
Blended investing can combine the strengths of both approaches. Passive funds can help manage costs and provide diversification, while active funds may offer opportunities to add value in selected areas.
Summary
The long-standing active vs passive debate has gradually shifted. Rather than focusing on which approach is superior, many portfolios now incorporate elements of both.
As Harry Garret, Head of Investment, explains: “The old active vs passive debate has had its day. It’s not about who’s right or wrong. Most investment returns come from asset allocation, and we take an active approach to that across every one of our investment solutions. From there, we give advisers the choice. Whether you prefer active, passive or blended funds, you can select what’s right for your client.”
With growing concentration in global market-weighted portfolios, maintaining control of asset allocation decisions has arguably never been more important.
If you’d like to learn more about how Parmenion approaches active, passive, and blended investing or understand more about our full range of solutions, get in touch today.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
