Risks beneath the index and the opportunities beyond 

For more than a decade, passive investing has shaped global asset management. Low costs, simplicity and strong performance have made index-tracking strategies increasingly popular. But beneath that success lies a more complex picture, shaped by concentration risk and by the opportunity cost of being underexposed to new structural growth areas.

These risks become more apparent as markets rotate, leaving investors in index strategies highly exposed to yesterday’s winners. In such conditions, active management offers a clear advantage: the ability to allocate selectively, manage risk and capture opportunities as they emerge.

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Passive strategies generally track indices weighted by market capitalisation, so the larger a company becomes, the larger its index weight.

Strong share-price performance automatically increases that exposure. The US offers the clearest example. A small group of technology giants, the Magnificent 7 – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla – has driven a substantial share of market returns.

Their dominance reflects real innovation, especially in AI and digital infrastructure, but it has also made index performance increasingly dependent on a narrow set of companies and themes.

Source: Bloomberg as at 31 March 2026. Based on research conducted by Defiant Capital Group.

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A similar pattern has emerged in South Africa. After years of weak performance, the equity market has recovered, but much of that rebound has been concentrated in a few sectors, notably precious metals companies supported by stronger commodity prices.

Among the top 25 companies in the FTSE/JSE All Share Index (Alsi), which make up roughly 75% of the index, resources increased from 22% to 31.3% over the past two years.

More tellingly, 25.6% of that 31.3% comes from just seven precious metals companies. Gold Fields and AngloGold Ashanti alone represented 14.6% of the entire index at the end of March 2026, up from 5.5% at the end of 2023.

Concentration is not inherently a problem if the leading companies keep delivering. But it does mean index-tracking portfolios become more reliant on a small set of businesses, and when leadership changes, as it eventually does, the effect on passive-heavy portfolios can be significant.

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The global economy has also undergone significant structural change. Technological disruption, geopolitical realignment and shifting supply chains are reshaping industries and redefining competitive advantage. Artificial intelligence and automation are accelerating change, while countries and companies are rethinking trade relationships, energy security and strategic priorities.

Supply chains are becoming more regional and resilient rather than simply cost-efficient. These forces explain much of today’s market leadership, but they are also creating the conditions for new winners and themes to emerge.

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For investors, that matters. Passive strategies tend to entrench exposure to established leaders, while active managers can adapt by allocating to new opportunities, responding to risk and repositioning portfolios as leadership evolves.

Active vs passive debate

The debate between active and passive investing is often presented as either/or, but in practice the strongest portfolios usually use both. Passive strategies offer efficient access to broad market exposure and can provide a solid foundation. Active strategies add the potential to improve returns, manage risk and allocate capital more dynamically.

The real question is not whether passive investing works – it does – but how much passive exposure is appropriate in the current environment, and when a greater allocation to active strategies makes sense.

Source: Bloomberg, as at 31 March 2026. Based on the top 25 stocks listed on the FTSE/JSE Alsi.

Several features of today’s market environment suggest that the opportunity set for active investors is widening. Concentration in major equity indices has increased, making returns more dependent on a relatively small number of companies.

Differences in valuation and growth prospects across sectors and businesses have also widened, increasing dispersion in potential outcomes.

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At the same time, the global economy is adjusting to technological disruption, geopolitical realignment and evolving supply chains.

Periods marked by concentration, dispersion and structural change often favour investors who can assess companies individually and allocate capital selectively. Passive investing remains an effective tool for broad market exposure, but it also reflects the market as it exists today, including its concentrations, imbalances and momentum.

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In a fast-changing world, relying only on index exposure risks anchoring portfolios too heavily to yesterday’s winners. Increasing exposure to disciplined, research-driven active strategies can help manage concentration risk, uncover emerging opportunities and adapt as market leadership shifts.

In our view, the next phase of the cycle calls for a deliberate tilt toward active management, alongside the flexibility to manage risk more effectively and capture new opportunities as they arise. Keep an eye out for the next installment in this series, where we explore some of the key assumptions and myths surrounding active and passive investing.

Siobhan Simpson is Head of SA Unit Trusts at Ninety One. 

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