Active strategies gaining in popularity amid uncertainty and higher rates

Fund selectors working with retail clients are showing a greater interest in active strategies amid global uncertainty and higher interest rates, according to a study from Rathbones Asset Management.

More than half (53 per cent) of independent financial advisers (IFA), discretionary fund managers (DFM) and private banker fund selectors said they were moving ‘significantly’ towards active strategies while maintaining core equity exposures due to the continued uncertainty.

Meanwhile, 18 per cent were switching to defensive and tangible assets and 29 per cent were going into cash and short-duration bonds.

Rathbones said a key driver of the growing popularity of active strategies was managers’ ability to pick sector winners, such as defence and cyber security, while avoiding companies with supply chains vulnerable to global uncertainty.

Higher interest rates and the growing gap between successful and unsuccessful companies was further driving this momentum, with 57 per cent of respondents saying they felt much more favourable towards active as a result.

In comparison, over a third (39 per cent) said they felt slightly more favourable towards passive strategies.

Active strategy switching momentum is expected to continue next year, as 95 per cent of fund selectors forecast their allocation to active strategies to increase in 2027, including 13 per cent who anticipated a significant increase.

The study found IFAs, DFMs, and private banker fund selectors were most likely to use only active strategies in emerging market equities and corporate bonds and high-yield debts, with 42 per cent just using active.

The same proportion did so in developed market large-cap equities, although 43 per cent said they were passive only for this asset class.

Almost all (99 per cent) respondents were concerned that passive growth trackers were over-exposed to companies that had stretched valuations, while 91 per cent agreed that certain markets, including small caps and emerging market debt, were unsuitable for passive indexing.

“Current macroeconomic conditions, the geopolitical environment and extreme market concentration within equity indices is part of the reason for the switch to active management, but fund selectors working for retail clients also recognise the attraction of being able to pick sectors and winners within sectors,” said Rathbones Asset Management CEO, Tom Carroll.

“That is driving growing interest in active strategies, which is likely to continue into next year no matter what happens with current global issues.”

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