The post-Covid equity run has produced one of the most concentrated bull markets in recent history, with just a handful of mega-cap tech titans driving the bulk of global stock market returns.
Supported by the AI revolution, the ‘Magnificent Seven’ – Apple, Microsoft, Amazon, Nvidia, Meta, Alphabet and Tesla – have collectively delivered the lion’s share of returns for both the S&P 500 and MSCI World Index in recent years.
The unprecedented concentration has presented significant challenges for traditional active managers. Many have struggled to justify overweighting or even including these dominant stocks due to fundamental valuation reasons, leaving a vast number of active strategies to lag benchmarks.
For many investors, this has prompted a revaluation of the merits of holding active core mandates.
Bridging the active and passive gap
For many clients, both advisory and institutional, passive investing has long been the go-to solution for efficient market exposure. Yet in today’s more complex, dynamic and uncertain environment, passive strategies come with structural limitations.
They offer no path to excess return, no ability to respond to market signals and no insulation from inefficiencies embedded in the index. While the annual underperformance may seem minor, the power of compounding means that over time it could result in substantial long-term opportunity costs.
The key is not simply being active, but being active in a smarter, more efficient, and adaptable way
Ultimately, in a market environment shaped by concentration and rapid shifts, the challenge may lie not in choosing between passive and active, but in adapting to a new investment reality.
The rise of passive does not signal a rejection of active management, but what is required is a reimagined form of active management – one that blends the discipline and cost efficiency of passive strategies with structured, risk-aware mechanisms for alpha generation.
The key is not simply being active, but being active in a smarter, more efficient, and adaptable way.
In other words, investors are not giving up on active – they are demanding better from it. They want exposure that remains benchmark-aware but retains an edge in seeking outperformance, as well as the flexibility to adapt to evolving market conditions without compromising risk control.
Additionally, investors are seeking fee structures that are competitive enough to rival those of passive solutions.
This opens the door for enhanced indexing – an active investment approach that bridges the gap between traditional passive and active management, aiming to outperform mainstream indices in a consistent, risk controlled and cost-effective way.
Ability to adapt as signals change
There are many approaches to traditional enhanced indexing or factor-based strategies, and most rely on fixed definitions and exposures – essentially ‘set-and-forget’ models.
But market dynamics never stand still. Economic cycles and changing market paradigms can all impact the effectiveness of these static strategies. Static allocations often lead to underperformance, even if the rationale is sound.
CIOs debate Active vs Passive at Dynamic Planner event
To generate alpha through enhanced indexing, we believe it is vital to continuously assess and reassess the factors – such as value, quality, growth and momentum – that consistently generate alpha in every region of the world and each market sector.
This allows strategies such as our BetaPlus solutions to evolve with markets, avoiding any rigidity. As factor leadership shifts frequently, it is essential to adapt as signals change and target exposures where the likelihood of excess returns is higher.
In today’s world of hyper-concentration and elevated complexity, we understand why a broad spectrum of investors, from advisers to major institutions, are increasingly allocating to sophisticated enhanced indexing strategies as a core building block of a client portfolio.
At Nordea, our BetaPlus strategies – which have a 15-year track record – have amassed €70bn of AUM in standard, sustainable and customisable solutions.
By bridging the gap between passive ease and active alpha, enhanced indexing is redefining the role of active management for today’s markets.
Cristian Balteo is senior investment specialist – BetaPlus enhanced equity solutions at Nordea Asset Management
