Passives, hammers and soup
Peter McGahan
Monday 31st August, 2026.
IN my final column on passive funds it may be worth reminding readers that for the last 25 years my aim has always to be the financial canary in the mine.
As my late father said: “When everyone is running one way, I walk the other.”
This healthy cynicism allows us to think unemotionally before it’s too late.
The investment world loves a fight with only two corners. Passive good, active bad. Active clever, passive dangerous. That’s binary twaddle.
Real financial planning is not a crass football chant.
Passive investing is not the enemy. Expensive, lazy active management deserved every bruise it received. A tracker can be an excellent way to own broad markets cheaply, especially where information is widely available and most active managers struggle to justify the extra cost.
But a tracker is not a financial plan. It is a component. So is an active fund, an investment trust, cash, gilts, fixed interest, structured withdrawal planning and a good conversation about what the money is for.
Passive funds can form the cheap engine room. Consider their use for broad, liquid markets where low cost, transparency and diversification genuinely help. Global developed equities, some bond exposures and large mainstream markets can often be accessed well through passive vehicles. But choose the index with eyes open. The index is the strategy. Its geography, sector weights, currency exposure, rebalancing rules and concentration are not small print. They are the thing you are buying.
Active management has a clear job. Not because active sounds more sophisticated, and certainly not because the manager has a lovely quarterly letter and a photograph looking thoughtfully out of a window.
Use active where the market is less efficient, where research matters, where governance matters, where liquidity is rewarded and where the benchmark is a poor map. UK smaller companies, specialist income, parts of fixed interest, investment trusts, unconstrained mandates and genuinely differentiated global equity managers can all have a role. The test is simple: what is this manager doing that a tracker cannot do, and why should the client pay for it?
“They have underperformed lately but we like them”, is not enough. If the answer is “they own different companies, have a repeatable process, manage valuation risk, engage properly and are expected to look wrong at times”, now we have something worth discussing.
Your adviser must also look through the whole portfolio, not admire each fund in isolation. A client may own 10 funds and still be dominated by the same handful of American technology shares, the same currency, the same growth style and the same market-cap weighting. That is not diversification. That is wearing 10 coats but only one pair of shoes. You are going to get hot at some point, and it may be too late.
So, ask your adviser to test your passives. Run the concentration test. Top 10 holdings across all funds and pensions. Sector exposure. Country exposure. Currency exposure. Style exposure. Overlap between funds. Exposure to single index providers. Liquidity. Stock lending. Physical or synthetic replication. The awkward question is: if one fashionable part of the market falls hard, how much of the client’s wealth falls with it?
Then manage flow risk. Rebalance with rules, not feelings. Keep enough cash or lower-risk assets for planned withdrawals so clients are not forced sellers in a downturn. A good active manager may lag a roaring index and still be doing the job. A passive fund may lead the performance table and still be quietly increasing risk.
You do not need a lecture on market microstructure, I know. You need the plain-English version: “We use passive funds where they give cheap access to markets. We use active funds where we want judgement, research, stewardship or exposure the index does not provide. We check that the overall portfolio is not accidentally crowded into one idea.”
That sentence would improve most people’s circadian rhythms.
The middle way is not fence-sitting. It is discipline. It says no to passive fundamentalism and no to active vanity. It says fees matter, but so does structure. It says performance matters, but so does how it was achieved. It says risk is not just volatility on a chart; it is concentration, liquidity, behaviour, sequencing, governance and the uncomfortable moment when everyone owns the same thing and wants to sell.
A good adviser should not be the priest of passive or the barrister for active. They should know which tool to use, why it is being used and what can go wrong if it is used badly.
A hammer is brilliant. Try eating soup with it.
I will be creating a guide to investing, so, if you would like a complimentary copy, please email info@wwfp.net.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
