Active vs passive investing: Why active management still matters in changing markets

When it comes to investing, one of the most common questions I hear is:

"Should I choose active or passive investing?"

If you've searched online, you have probably seen passive investing presented as the obvious choice: it’s typically lower cost, easy to understand and designed to track the market. That view has merit, but experience tells us the answer is not always so simple.

Investing is not only about participating in market growth. It is also about managing risk and making informed decisions as conditions change. That is why some investors consider active management alongside simply tracking an index.

At Lloyds Wealth, our portfolios are actively managed by investment specialists at Schroders. Their global research, specialist expertise and market insight help them assess risks and opportunities and keep portfolios aligned with investors' long-term objectives.

• Passive investing aims to track a market index, while active managers make investment decisions based on research and changing market conditions.
• Passive funds are typically lower cost, but their performance and risk exposure remain closely tied to the index they follow.
• Some major indices are increasingly concentrated in a relatively small number of large companies.
• Active managers can adjust portfolios when they believe risks are rising or opportunities are emerging.
• Active management does not guarantee better returns, but it provides ongoing professional oversight and flexibility.
• At Lloyds Wealth, Schroders' investment expertise is combined with personalised financial planning to help clients stay focused on their long-term goals.

Think of passive investing as following a sat nav that never changes route.

It follows the road exactly as planned, regardless of traffic, diversions or changing conditions.

Active investing is more like having an experienced driver who can assess the road ahead, react to unexpected events and take a different route if they believe it will help reach the destination more effectively.

Neither approach guarantees a better outcome, but they represent two very different ways of navigating investment markets.

Active investing is an approach in which professional portfolio managers assess markets, economies, sectors and companies, then decide what to buy, hold or sell. This ongoing research allows portfolios to evolve as risks and opportunities change.

Passive investing aims to mirror a market index, such as the FTSE 100 or S&P 500, rather than selecting investments through research or market views. It can provide broad exposure at a lower management charge, but it generally rises and falls with the market it tracks and does not actively respond to emerging risks or opportunities.

One aspect of passive investing that can surprise investors is the concentration of some market indices. The S&P 500, for example, contains hundreds of companies, yet a significant proportion of recent performance has been driven by a relatively small group of large US technology businesses, often called the Magnificent Seven.

When these companies perform strongly, passive investors benefit. But because index-tracking funds tend to allocate more money to the largest companies as they grow, investors can become more exposed to a small number of businesses than they realise.

Active managers can take a different approach. Rather than following index weightings automatically, they can assess whether particular sectors, regions or companies have become overly concentrated and adjust portfolios where they believe risks are increasing or opportunities may exist elsewhere.

The fundamental difference is flexibility. Passive funds remain aligned to their chosen index, while active managers can reassess portfolios as new information emerges.

That flexibility can become particularly relevant when interest rates, inflation, government policy, geopolitics or technology disrupt markets. An active manager can reduce exposure where risks appear to be rising, increase exposure to emerging opportunities, assess company fundamentals and seek diversification beyond concentrated market leaders.

No approach guarantees positive returns, but active management allows decisions to reflect current information rather than simply following the market's direction.

One strength of the Lloyds Wealth proposition is our partnership with Schroders Investment Management, an established active manager with investment professionals, economists and analysts across global markets.

Schroders' specialists use global research and local insight to monitor economic developments, company fundamentals, valuations and emerging themes. They can adjust positioning where they believe it is appropriate in pursuit of clients' long-term objectives.

For clients, this means portfolios benefit from ongoing oversight and professional decision-making rather than being left on autopilot.

The active-versus-passive debate often focuses on investments, but most people invest to achieve life goals such as retiring comfortably, supporting family or building long-term financial security.

At Lloyds Wealth, active investment management is combined with personalised financial planning. While Schroders manages portfolios, our advisers help keep investments aligned with each client's objectives, attitude to risk and changing circumstances.

Together, this creates an approach focused on helping clients achieve better financial outcomes, not simply tracking market movements.

Passive investing remains an accessible and important part of the investment landscape. But with some indices increasingly concentrated and markets shaped by economic, political and technological change, investors may value the ability to adapt rather than simply follow.

Through our partnership with Schroders and personalised financial advice, Lloyds Wealth combines professional investment expertise with long-term planning to help clients navigate changing markets and stay focused on their goals.

This article is for information purposes only and should not be considered financial advice or a recommendation to invest.

Fees, charges and eligibility criteria apply.

The value of investments and any income from them can fall as well as rise, and you may get back less than you originally invested.

Past performance is not a reliable indicator of future results.

Tax treatment depends on individual circumstances and may change in the future.

References to specific companies, sectors, investment themes or market indices are provided for illustrative purposes only and do not constitute an investment recommendation.

Any views expressed are those of Lloyds Wealth at the time of publishing and may change.