Passive is winning the flows. But is it winning the debate?

What was once about beating the benchmark is now about who does the hard work of valuation, engagement and long-term thinking.

On one side sits the passive juggernaut. It promises low costs, transparency and broad exposure. The intellectual case is powerful: markets are broadly efficient, costs compound and most active managers underperform after fees. Academic research has long reinforced that skill is rare and consistency elusive.

On the other side stand active managers who argue that this framing is incomplete. Markets are not static. Capital is not allocated by spreadsheets. Price discovery, governance and long-term capital allocation require judgement and conviction. Mechanical benchmark flows, they warn, can distort incentives and weaken the link between investors and the companies they own.

At Active Advantage 2026 - Beyond the Benchmark, hosted by Baillie Gifford, Orbis and MFS, that divide was confronted directly. Some speakers acknowledged the uncomfortable truth that most active managers fail. Others countered that without active participants, markets themselves cannot function properly.

Keynote speaker Professor Martijn Cremers, co-creator of the “Active Share” metric, set the tone. If passive continues to dominate, who does the work of stewardship and price discovery? And if skill is fragile, how should investors identify it?

Those were the questions framing the debate.

Rethinking the academic verdict

The case for passive begins with simple maths. Active managers collectively are the market. Before fees, it is zero sum. After fees and costs, it becomes negative sum, meaning the average active manager underperforms.

Cremers noted that the academic consensus has long held that “active management does not, on average, create value for investors.” That conclusion draws heavily on Mark Carhart’s 1997 study, which argued that “The mundane explanations of strategy and investment costs account for almost all of the important predictability in mutual fund returns.”

In other words, what looks like skill may largely be factor exposure and fees.

Cremers does not dispute the data; he disputes the comparison. Many studies benchmark active managers against theoretical factor models that are not directly investable. When compared to those constructs, underperformance appears decisive. 

But when measured against real, investable benchmarks, he argues that “the evidence for average performance simply disappears.”

The debate, then, is not just about whether skill exists. It is about whether it has been measured against the right benchmark. 

The fragility of skill

Even if the benchmark is correct, another challenge remains. How do we separate skill from luck?

Graeme Forster, Portfolio Manager at Orbis, approached it statistically. In his thought experiment, managers were judged by their success ratio – the proportion of stocks in a portfolio that outperform the market over a six-year period.

A random “Dr Darts” achieved around 50%. A perfect stock picker, “Professor Edge,” reached roughly two-thirds, or 67%.

“Even over a six-year period… It’s incredibly difficult to generate edge.”

The conclusion is that while skill may exist, genuine ability can be masked by volatility and chance. When the observable difference is 67% versus 50%, the gap between luck and brilliance can look surprisingly small.

Ownership, Incentives and Capital Allocation

If skill is rare and fragile, why defend active at all?

For Carol Geremia, MFS President, the answer is structural. She recalled a pension CIO telling her, “We have to care about active management.” Why? “Because we are the largest owner of passive product.”

Even investors allocating heavily to passive strategies depend on markets functioning properly. Markets only function properly if someone is setting prices, analysing businesses and engaging with management teams.

Geremia was clear that passive managers do care about governance. 

“Of course they do and I wouldn't suggest that they don't.” But she added, “They're not in a position to do that and they're not paid to do that actually.”

Passive funds track an index. They own companies because they are included, not because they have formed a view on valuation or capital allocation. The work of price discovery and corporate scrutiny, therefore, falls disproportionately on active investors.

Tim Campbell, Managing Partner and CEO of Baillie Gifford, pushed the argument further. 

“Markets are treated as an end in themselves.” 

His concern was that trading activity and benchmark awareness can dominate the conversation while the harder work of capital allocation inside companies receives less attention.

Stock markets do not directly create wealth. Wealth is created inside companies through capital deployment, innovation and productivity gains. Management teams decide how cashflow is reinvested. Markets facilitate ownership and liquidity.

Campbell also warned of a growing free-rider problem. Engagement is costly, but the benefits accrue to all shareholders. If too many owners rely on others to do the work, stewardship resources shrink and companies risk becoming effectively ownerless.

The debate becomes less about labels and more about incentives. Who is aligned with long-term capital allocation? Who is prepared to back a business for years, not months?

Cremers’ research on Active Share reinforces that capturing company level wealth creation requires genuine differentiation. Managers who hug the benchmark to manage career risk reduce their chance of owning the small number of exceptional businesses that drive outsized returns.

Concentration, dispersion and opportunity

If markets are increasingly benchmark driven, what does that mean for opportunity?

Major indices are dominated by a handful of mega-cap stocks. For some, that reflects efficiency. For others, it suggests distortion.

Hamish Maxwell, Investment Specialist at Baillie Gifford, argued that “Markets have always been a power law.” Returns are not evenly distributed. A small minority of exceptional companies generate a disproportionate share of long-term gains.

Greater concentration can compress opportunity in the short term. But widening dispersion increases the payoff to genuine differentiation. If returns are driven by a minority of businesses, identifying and holding them becomes critical.

Forster’s earlier thought experiment highlights that difficulty. Observable edges are narrow. Yet in a regime where outcomes diverge sharply between winners and losers, being right matters enormously.

Sceptics argue that dispersion themes recur every cycle. Enthusiasts counter that structural shifts, from artificial intelligence to the energy transition, are precisely the environments where stock selection matters most.

The tension remains unresolved. Concentration can look like efficiency. Dispersion can look like opportunity. Whether that opportunity is realised depends on conviction, time horizon and a willingness to differ from the benchmark.