Passive investment funds have become a familiar feature in the portfolios of many investors around the world. However, as geopolitical uncertainty upends investment markets, actively managed investments may offer the flexibility needed to protect and grow investors' savings through the storm.

Understanding the passive paradigm

Passive funds, or index funds, seek to mirror the performance of investment markets - rather than exceed their performance. This is done by purchasing the underlying assets in an index according to each asset's market capitalisation.

By offering broad market exposure at relatively low fees, passive funds grew from less than 5% of the US mutual fund and ETF market to 53% over the 30 years to December 2024.¹ In particular, passive funds became popular in the wake of the 2008 Global Financial Crisis as investors rode the wave of historically low interest rates and high liquidity.

Growing market uncertainty

As we enter the second half of the 2020s, the economic realities facing investors are shifting. We're experiencing:

• Greater geopolitical uncertainty and risk. In recent years investors have navigated the impact of Russia's invasion of Ukraine, tension with China and open conflict in the Middle East. Adding to the disruption, this year the US spearheaded restrictive international trade policies, hiked tariffs and significantly increased national debt - up-ending markets further.
• Concentration risk. Concentration is where a small number of companies drive much of an index's movement. At the end of 2024, just ten companies represented 36% of the value of the US market, the highest level of concentration in 40 years.² The three largest being technology companies: NVIDIA, Microsoft and Apple. As passive funds typically weight their asset allocations based on market capitalisation, investors in these funds have also seen an increase in their exposure to a smaller number of companies.
• Weakening US economy. Off the back of a strong 2024, some commentators see the US economy heading towards a slowdown.³ It's a scenario that many investors in passive international funds will be significantly exposed to. Indeed, the popular MSCI World Index has a 72% weighting towards the US.⁴ In contrast, active managers can use their research capabilities and agility to invest outside the US if they see stronger opportunities elsewhere - particularly in emerging markets where the gap between winners and losers can be very large. In these smaller markets, monitoring, research and a more considered investment approach can deliver improved performance.

Taking action

In uncertain and volatile trading conditions, active fund managers use their experience and skills to select investments based on research considering wider macroeconomic, social and geopolitical factors -along with company fundamentals. They then apply these insights using a tested investment strategy. This means active managers should be better positioned to:

• Manage downside risks - adjusting portfolios to diversify away from sectors with greater risk and concerning levels of concentration.
• Invest opportunistically - capitalising on inefficiencies and mispriced assets, as well as making opportunistic investments in response to volatility. An example of this came in April this year, when the US Government announced a flurry of new tariffs on major trading partners and triggered a panic-fuelled sell-off around the world. Days later, the US government relented, and global markets promptly rebounded.⁴ Investors who bought in the dip opportunistically acquired assets at lower prices.
• Invest in smaller companies - casting the net wide to identify the best outcomes for their investors. Companies that are large now were small once. By their nature, most passive funds are unable to take advantage of these types of emerging opportunities in a targeted way.

The key takeaway is that when there's a lot of geopolitical uncertainty, active investment managers may have the experience and agility needed to wisely navigate through the storm.

References for compliance approval:

1. T. Rowe Price, 'Active investing is suited to the uncertain markets ahead', July 2024, accessed 28 July 2025 and Morningstar, US Fund Flows: Picking Up Steam in 2024, 21 January 2025, accessed 29 July 2025

2. A Oldenburg, T Kuznetsov, 'Active Management Is Suited to Uncertain Times', Morgan Stanley, May 2025, accessed 28 July 2025

3. BNP Paribas, Economic Research, 25 July 2025, accessed 28 July 2025

4. MSCI, MSCI World Index, 30 June 2025, accessed 28 July 2025

5. National Australia Bank, 'Business Research & Insights', May 2025, accessed 28 July 2025.