Active Equities: Maximizing Returns With New Strategies

Most investors are playing with outdated rules. The verdict on active equities has been handed down, repeated endlessly, and accepted without challenge. In fact, that lazy consensus is quietly costing portfolios real money.

For over a decade, the passive wave dominated. SPIVA data showed nearly 89% of actively managed U.S. equity funds failing to beat their benchmarks. That number became gospel, and entire investment philosophies got built around it.

But here is what nobody is saying loudly enough: the conditions that made passive investing the winning formula have fundamentally changed. The regime has shifted, the inefficiencies are back, and the investors still running on decade-old assumptions are the ones carrying the real risk now.

Why the Old Argument Against Active Equities Is Broken

The case against active equities was never as clean as the headlines made it sound. It was built on a specific era, one defined by near-zero interest rates, suppressed volatility, and tightly correlated markets where passive exposure to market beta was essentially free money.

In that environment, skilled managers couldn’t find enough pricing dislocations to justify their fees. To be clear, that’s not a flaw in active equity investing as a discipline. That’s a flaw in deploying any strategy in the wrong market regime.

According to research from J.P. Morgan Asset Management, greater inflation uncertainty, central bank normalization, and rapid technological innovation are now driving increased market volatility and dispersion. These are precisely the conditions under which skilled active managers have historically found an edge.

The Survivorship Problem Nobody Talks About

Through mid-2025, only around 33% of active strategies survived and beat their passive counterparts. That sounds damning until you examine what that number actually captures.

Funds that persistently underperform get merged into other funds or shut down entirely. Consequently, their track records quietly disappear. The 33% figure isn’t just a performance metric; it includes a survival filter that distorts the real picture of where active management works and where it doesn’t.

Once you strip out the noise, a more important question emerges: which types of active equity strategies are actually delivering, and why?

The Passive Concentration Trap

Here is an uncomfortable fact for passive-only investors. The dominance of index investing has made equity markets structurally fragile.

Returns have become increasingly concentrated in a handful of mega-cap names, a dynamic that has punished diversified active managers while simultaneously creating exploitable mispricings further down the market cap spectrum.

Passive funds are forced buyers and sellers regardless of fundamentals. Therefore, they must own what the index dictates. When volatility spikes or sentiment shifts, that structural rigidity becomes a liability, and the skilled active manager’s ability to move fast becomes an asset.

Where Active Equity Strategies Actually Generate Alpha

Not all equity markets are equally efficient. That distinction is everything. To illustrate, large-cap U.S. equities, where information gets priced in almost instantly, remain the toughest terrain for active managers.

Around 59% of large-cap equity managers trailed their benchmarks through mid-2025, largely because mega-cap concentration drove index returns that diversified portfolios couldn’t replicate.

However, move into less-trafficked corners of the market, and the calculus changes dramatically. Understanding where the real opportunities lie is the difference between smart active allocation and expensive underperformance.

Small-Cap Equity: Where Coverage Is Thin and Opportunity Is Real

Small-cap equity markets carry significantly less analyst coverage than their large-cap counterparts, often 50% less. As a result, that gap creates genuine pricing anomalies that reward deep fundamental research.

The data backs this up. In 2024, small-cap equity managers achieved roughly a 43% success rate in beating benchmarks like the Russell 2000. That’s a meaningful improvement over the large-cap figures and reflects a market where skilled stock selection still earns its fee.

Investors evaluating small-cap active funds should demand one specific metric: active share. This measures how different the portfolio actually is from its benchmark. For instance, if a fund’s active share falls below 80%, it’s hugging the index while charging active management fees, which is the worst of both worlds.

Quantitative Active Equities: Systematic Alpha at Scale

One of the most compelling developments in active equity investing is the rise of systematic, factor-based approaches.

Instead of relying on a single analyst’s conviction, quantitative active strategies rank stocks across multiple dimensions (value, momentum, quality, and short-term signals) using disciplined, rules-based models that remove emotional bias from the process.

For example, Robeco’s Quant Active Equities strategy offers a clear example of this approach in action, combining multi-factor stock selection with proprietary portfolio construction algorithms designed to balance risk, return, and sustainability considerations simultaneously.

The appeal is straightforward. Quantitative models can analyze thousands of securities across global markets simultaneously, exploiting breadth in ways that fundamental analysts simply cannot match.

Furthermore, these systematic processes can adapt to changing factor regimes without the behavioral biases that frequently undermine discretionary decision-making.

Active Extension Strategies: Beyond the Long-Only Constraint

Traditional long-only portfolios have a fundamental problem. Managers can only express negative views on a stock by underweighting it. For the majority of index constituents, which carry weights below 100 basis points, that underweight is severely limited in scope.

Active extension strategies solve this directly. By allowing managers to take short positions on unattractive stocks while reinvesting those proceeds into high-conviction long positions, these strategies dramatically expand the range of alpha opportunities available.

According to Man Group’s research, active extension portfolios consistently show higher transfer coefficients than long-only alternatives, meaning managers translate their insights into actual portfolio positions more effectively.

Over 90% of assets in active extension strategies are currently managed quantitatively, reflecting how well systematic models handle both sides of the portfolio simultaneously. Ultimately, the approach maintains full market beta exposure while targeting meaningfully higher excess returns.

The Real Cost Structure of Active Equity Investing

Of course, active equities carry real costs. Dismissing them is intellectually dishonest, while confronting them honestly is how investors make better decisions.

The average asset-weighted fee for active mutual funds sits around 0.36% annually, compared to roughly 0.05% for passive index alternatives. In fact, that 31-basis-point gap represents the minimum outperformance an active manager must generate just to break even on a net basis.

For funds charging 0.80% or more, that hurdle jumps to 75 basis points every single year.

Beyond the headline expense ratio, turnover creates additional drag. Funds with annual turnover rates between 50% and 100% generate transaction costs that can add another 0.20% to 0.50% to the total cost of ownership.

In taxable accounts, high turnover frequently produces short-term capital gains taxed at ordinary income rates, potentially up to 37% federally.

Here is a clear breakdown of the cost layers active equity investors must account for:

Cost Category	Typical Range	Impact on Returns
Expense Ratio (Active)	0.36% – 1.00%+	Direct annual drag on NAV
Expense Ratio (Passive)	0.03% – 0.10%	Baseline comparison hurdle
Transaction/Turnover Costs	0.20% – 0.50%	Hidden drag not in headline fee
Tax Inefficiency (Taxable)	Varies (up to 37% on gains)	Compounds annual cost burden

These numbers argue for precision, not paralysis. You should place tax-inefficient active strategies inside tax-advantaged accounts like 401(k)s or IRAs. Also, demand transparency on turnover rates before committing capital.

The fee conversation is legitimate; however, it should inform where and how you use active equities, not whether you use them at all.

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How to Select Active Equity Managers That Actually Deliver

Most investors pick active managers the wrong way. They chase recent performance, flood capital into funds after strong years, and exit during underperformance.

That behavioral pattern, driven entirely by recency bias, is why average investor returns consistently fall below even the average manager’s stated performance over the same period.

Successful active equity investing requires a different discipline entirely. The CFA Institute’s framework on active equity strategies outlines two broad approaches, fundamental and quantitative, each with distinct evaluation criteria.

When evaluating any active equity manager, these are the factors that actually matter:

• Examine the active share metric, as anything below 70-80% suggests the fund is too close to its benchmark to justify active fees.
• Assess the investment process to determine whether the strategy is rules-based, discretionary, or a hybrid, and verify it matches the stated philosophy.
• Evaluate performance in context because short-term underperformance during momentum-driven markets is not evidence of a broken process.
• Review turnover and total cost of ownership, not just the headline expense ratio.
• Scrutinize the team structure since manager dependence creates key-person risk; institutional depth matters.
• Confirm the strategy fits your tax situation because high-turnover active funds in taxable accounts are a persistent drag.

Discipline through underperformance cycles is what separates investors who capture active management’s full potential from those who repeatedly buy high and sell low. Importantly, that discipline is not emotional; it’s analytical.

It means staying the course when the process is intact, even when short-term numbers are uncomfortable.

Building a Portfolio That Uses Active Equities Strategically

In reality, the active-versus-passive debate is a false binary. Sophisticated portfolios treat active equities as a deliberate allocation within a broader framework, not an all-or-nothing stance.

A practical approach for U.S. investors might allocate passive index funds to highly efficient large-cap domestic equities, where the cost of active management is hardest to overcome.

Meanwhile, active strategies find their strongest role in small-cap equity, emerging markets, and quantitative extension strategies where market inefficiencies remain exploitable.

Strategic tilts toward value, quality, or momentum factors can add incremental returns of roughly 0.5% to 1.5% annually over long horizons, based on historical evidence. Over time, those gains compound meaningfully over a 10- or 20-year investment horizon, even accounting for the variance and patience those tilts require.

The key is intentionality. After all, every allocation decision is an active decision, even choosing a passive index fund. The question is never passive versus active; it is always whether the expected net return justifies the cost and complexity for that specific market segment.

Final Verdict on Active Equities in Today’s Market

The case against active equities was time-specific, not timeless. It was built for an era of cheap capital, low volatility, and compressed dispersion, an era that no longer exists.

Now, regime change has reopened the playing field. Rising volatility, inflation uncertainty, and growing market dispersion have restored the conditions under which skilled active managers historically thrive.

For example, quantitative multi-factor strategies, active extension approaches, and small-cap fundamental investing are already producing evidence that the narrative has shifted.

Costs are real and must be managed carefully. Manager selection demands rigor, not recency bias. And disciplined allocation, placing active equities where inefficiency is highest and passive strategies where efficiency dominates, is what turns this from theory into actual portfolio performance.

The investors who reassess now, with clear eyes and current data, are the ones positioned to capture what the next decade of active equity investing has to offer. In short, everyone else is still fighting last decade’s war.

Watch this short video that explains active equities strategies for maximizing returns.

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