‘Active’ is More than a Label
Some active managers may prosper when AI rolls over — most probably won’t though: Choose carefully.
I believe active management can be an antidote to the concentration risks building in index funds, but I wanted to sound a note of caution: It won’t be enough that it says ‘active’ on the tin, you’ll have to open the lid and inspect its contents too. Because many active products will fare no better than their passive equivalents, and may actually turn out worse.
This is because of Darwinism, which is a never-ending process. Yes; it selects for the fittest, but it never declares a final winer. And one way it selects the truly fittest is to eliminate players who fail one test, but then pose the exact opposite test, and eliminate those failures too. This leaves few long-term survivors.
Before I tie this back to investing, it’ll be useful to give you a grimly fascinating real-life example of this double Darwinism in action.
The Pacific island of Nauru is hundreds of miles from any other land mass, and yet — 3,000 years ago — a few brave souls managed to paddle there to populate it. Their canoe journey was Darwinian — only those capable of resisting starvation would have survived, meaning they, and their descendants, were genetically better at getting by on fewer calories (a so called “thrifty gene”).
This was then pushed further in the Second World War. Nauru had become strategically important because of its location and its phosphate deposits — a crucial ingredient in modern fertilisers — and, unfortunately for the Nauruans, this led to occupation by Japan.
The islanders’ experience was brutal, with many starved to death in camps. This exacerbated the surviving islanders’ original genetic thrifty disposition, leaving only those super-survivors who could endure extreme calorie deficits.
But then Darwinism posed the opposite test. In 1968 the island became independent, and two years later they bought back their mining rights. This led to spectacular wealth, especially for such a small population.
Good news, you would think. Except it wasn’t: It allowed the islanders, who — remember — had been naturally selected for their bodies’ ability to use calories sparingly, to afford American-style high-calorie, processed diets.
The result?
A tragic health crisis. 60 to 70% of the population are clinically obese, and Nauru has the highest type-2 diabetes rate in the world. Their death rate from non-communicable diseases is second only to Afghanistan (whose problems stem from poverty, not abundance).
We must be wary of this kind of Darwinian 180-degree turn in the wealth world too.
Get Simon Evan-Cook’s stories in your inbox
Join Medium for free to get updates from this writer.
The IA Global Emerging Market funds sector shows why. Like Nauru, it has recently been through a couple of extreme market “natural selection” events.
First came the rise of high index concentration in Chinese tech giants, which peaked in 2020. This was swiftly followed by the same thing, but this time for Taiwanese and Korean tech manufacturers. Currently just three companies — TSMC, Samsung and SK Hynix — make up almost a third of an emerging markets tracker.
This has been a nightmare for most active managers. They tend to run diversified portfolios that avoid expensive stocks, so if index performance is driven by the exact opposite, they underperform. This puts them at heightened risk of losing assets and getting sacked.
So, with only a few exceptions, they either lost their seats or adapted to the new conditions. Adapting here means either copying the benchmark by holding the same huge companies, or — if they’re trying to catch up and overtake — buying even more of the winning AI trade than their index (you might call this selecting for an “index-plus gene”).
And then came July. This gave us a little taster of what a reversal of the three-year AI mega-trade might look like.
This posed the opposite test which, I’m sad to say, the average “active” fund failed with flailing colours: Having lagged the index in the preceding three years, with the excuse being that the index was too concentrated, the average fund then underperformed in July too, when all the concentrated index stocks had their long-awaited pullback.
This was the average manager’s time to shine, and they blew it.
I put this down to corporate Darwinism. Too many managers have capitulated or yielded to corporate pressure to hug the benchmark, or — if they refused either of those — been fired and replaced.
Professional fund selectors aren’t helping. When you look at the top-selling funds in many sectors, you’ll find lots of tepid “core plus” funds. This looks a lot like the closet-tracking epidemic of the late 90s, except at least this time they’re honest about their index hugging and are charging lower fees too.
Where it’s less honest and more expensive, I’d suggest, is in the DFM and MPS world. When you lift the lid on many of the “active” ranges here, they’re not that different to their cheaper, passive options. Many still own plenty of trackers, and the insipid core-plus funds too. If you’re relying on these to move you away from index concentration risk, I don’t think most will fare much better.
There is good news, however. Some great active funds have made it through the Darwinian filter. All four of our own emerging market fund picks, for example, rose substantially in July, while the index and average fund both lost more than 4%. Meanwhile, the previous three-year winner — the active fund judged ‘most fit’ under the previous regime — fell by 10%.
So that’s the message. If index concentration worries you, which it should, then it’s not enough to pick any old active fund, or to pick the best of the last three years either. You’ll need to work harder than that. I’d suggest seeking out those surviving stockpickers who have doggedly ignored the crowd, and stuck to those old-school principles of diversification, valuation, and quality.
This article first appeared in Citywire Magazine in September 2026.
Disclaimer
These are my own personal opinions for informational and educational purposes only and not financial advice. Nothing here should be treated as a recommendation to invest or take any specific action.
I’m not your financial adviser, and you should do your own research or seek professional advice before making decisions. Any reliance you place on this content is at your own risk, and I accept no liability for any losses incurred.
