By separating a traditional active equity portfolio into two groups, institutional investors can gain resilience and add value at a time when active global equity strategies have struggled to outperform, said David Alloune, vice-president of asset allocation at Trans-Canada Capital Inc.
“A passive investing approach on the largest portion of institutional portfolios is probably not an optimal solution,” he said during a session at the Canadian Investment Review’s 2025 Investment Innovation Conference.
Inspired by a portable alpha method approach, investors can have two building blocks in the equity portfolio, said Alloune, noting one replicates the portfolio’s benchmark like a passive investor, while the other takes active risk in pursuit of adding value higher than the benchmark.
Read: Head to head: Should pension plans be investing actively or passively?
This investing style provides the ability to isolate benchmark risk by replicating it with passive equity exposures at a low implementation cost, while efficiently using capital of the fund to build its active risk, he added.
“Separating the beta and introducing absolute return strategies in the total fund approach to separate those two risks, . . . [means] they can each be managed on their own terms.”
However, Alloune also highlighted implementation complexities of this method, noting they can be addressed with good governance and fund structure. “The true challenge is to get the willingness from investment committees to take a step forward towards this non-traditional approach.”
Despite structural risk considerations, he said selecting an active approach can help institutional investors prevent the disappearance of alpha in global equity strategies. This can be achieved, he noted, by expanding the scope of investible strategies to include extension funds and equity long shorts, producing a greater dispersion of returns compared to the long-only universe.
Read: Reliance on premium technology stocks limiting diversification for institutional investors: expert
A passive only approach in global equities is particularly risky, said Alloune, since there’s an increasing concentration risk due to the group of leading technology equities known as the Magnificent Seven.
On a rolling five-year basis, excess returns above benchmarks for global equity managers are declining, he said, according to a data set constructed to evaluate equity managers in the long-only universe.
The data showed the average global equity long-only manager generated a 1.8 per cent return above benchmark in 2015, but in 2025 the result is below zero. “This means more than half of global equity long-only managers are underperforming their benchmark.”
Read more coverage from the 2025 Investment Innovation Conference.