Top of Mind: Challenging false investment dichotomies

Key arguments

• The active/passive, US/non-US, and public/private debates are false dichotomies; both sides can play a role, and the focus should be on how to allocate between them.
• Passive investing is simple, cheap, scalable, and has performed well, but an index is not a fiduciary: a cap-weighted portfolio need not match an investor's objectives, constraints, or risk sensitivities.
• Alpha is cyclical; two of three key alpha drivers — market correlation and dispersion — have turned more favorable for active management, while market breadth remains narrow though improving.
• Investors should not dismiss active management in efficient markets like US large caps, given the market's large portfolio weight; portable alpha, 130/30 extension, and Core 2.0 strategies can help manage concentration risk and pursue alpha.
• A global equity strategy is a simple starting point for diversification, though it reduces control over US/non-US splits; any regional tilt should be deliberate and carefully sized.
• Emerging market equities offer attractive valuations, improving governance, strong technology exposure, and shareholder-friendly management; Wellington Solutions holds a positive tactical view on EM equities.
• Private assets offer return potential and a differentiated opportunity set, but their volatility advantage is partly perceived; public assets offer lower cost, simplicity, liquidity, transparency, and scalability.
• Traditional mean-variance optimization is less useful for private assets due to limited data; a role-based framework (diversification, income, inflation resilience) allows consistent comparison of public and private strategies, and hybrid or proxy strategies can integrate the two.

Corresponding source evidence

1. • Portable alpha, extension (130/30), or “Core 2.0” strategies may help navigate concentrated markets.
2. But in recent years, two of the three — correlation and dispersion — have turned in a more positive direction, driven by the move from a relatively stable economic environment to one marked by higher inflation, deglobalization, and growing policy variations across different regions.
3. As a starting point, I’ll offer this guidance: In deciding to go passive in a particular market, I think you need to believe that 1) a cap-weighted portfolio aligns with your objectives and can help you achieve your return target (without any incremental return above what passive provides) and 2) that the market is relatively efficient.