Index-tracking strategies are now firmly embedded in adviser portfolios. While their early appeal centred on cost, their continued growth reflects a broader set of strengths - particularly transparency, consistency, and their role in supporting actively managed portfolio construction.
Over the past two decades, what is often broadly described as passive investing has evolved from a niche, sometimes misunderstood approach into a widely accepted core building block. Clients are increasingly familiar with it and, in many cases, actively seek it out. This shift reflects not just improved access and lower costs, but a growing recognition of how effectively index-based strategies can support long-term investment discipline.
In this context, it is helpful to draw a distinction between index-tracking strategies and passive investing. By index-tracking strategies, we refer to low-cost funds designed to follow specific market indices, which can be used as building blocks within portfolios. Passive investing, by contrast, is often associated with static, buy-and-hold asset allocations. At Evelyn Partners, our Index MPS sits firmly in the former camp: actively managed portfolios implemented using index-tracking strategies.
A clearer framework for advisers
One of the key advantages of index-tracking strategies is the clarity they bring to portfolio construction. They provide full transparency over underlying exposures, allowing advisers to implement asset allocation decisions with precision.
Given that asset allocation remains the primary driver of long-term returns, this is a significant benefit. Index-tracking strategies enable advisers to express those views cleanly, without introducing additional variables such as manager style drift or changes in process. This approach allows for active decision-making at the portfolio level, without relying on active fund selection.
That is not to say active management does not have a role. Rather, index-based approaches can provide a stable, predictable foundation on which portfolios can be built.
Raising standards across the industry
The growth of index investing has also had a wider impact. Increased competition has contributed to lower costs across both index-tracking and active funds, supporting improved investor outcomes over time, although returns are not guaranteed and investments can fall as well as rise in value.
In this sense, indexing has helped reshape expectations - not just on fees, but also on transparency and consistency.
Moving beyond "active vs passive"
For advisers, the traditional "active versus passive" debate is becoming less relevant. In practice, portfolio construction sits on a spectrum.
Even portfolios built using index-tracking strategies involve active decisions, from asset allocation and rebalancing to index selection. This is a key distinction from more traditional passive approaches, which tend to follow static allocations with limited ongoing adjustment. Equally, many active strategies remain closely aligned to benchmarks.
More importantly, focusing too heavily on this debate risks missing a bigger issue: encouraging more people to invest. In the UK, many individuals remain in cash rather than investing. Ensuring clients are appropriately invested for the long term can be more impactful than how a portfolio is labelled.
Avoiding unintended risks
As index investing has grown, so too have the risks associated with its default positioning, particularly in market-cap-weighted indices.
The strong performance of global equities over the past decade, driven largely by US mega-cap stocks, has increased concentration within portfolios. As market conditions shift, this can lead to unintended exposures.
Recent market dynamics are a useful reminder that leadership changes and cycles evolve. A purely market-cap-weighted approach, often associated with traditional passive investing, may not always deliver the level of balance or diversification clients expect.
A more evolved approach to indexing
The index toolkit has expanded significantly, allowing for more refined portfolio construction while retaining its core benefits.
At Evelyn Partners, we start with a central asset allocation framework to ensure consistency across portfolios. From there, portfolios are actively managed using index-tracking strategies as the primary building blocks, rather than adopting a static passive allocation.
Market-cap-weighted indices often provide an efficient starting point. However, exposures are adjusted where needed to address concentration risks or style biases. This can include incorporating equal-weighted or fundamentally weighted strategies to achieve a more balanced outcome.
In fixed income, we take a similarly considered approach, actively managing duration and credit exposure rather than relying solely on benchmark positioning. We also incorporate additional diversifiers where appropriate to support overall portfolio resilience.
A key differentiator within our approach is the inclusion of gold as a strategic allocation. Gold has historically provided diversification benefits, particularly during periods of market stress and inflationary uncertainty. Its inclusion has been a strong performer and contributor to portfolio resilience in recent years and sets our approach apart from many more traditional passive portfolios, which often lack exposure to alternative diversifiers.
A practical role in client portfolios
For IFAs, the role of index-tracking strategies within an actively managed framework extends well beyond cost efficiency. Used effectively, they can:
Provide a clear and consistent foundation for asset allocation
Enhance transparency and client understanding
Improve overall portfolio cost efficiency
Support more precise management of risk and exposures
They also offer flexibility, allowing advisers to blend index-based and active strategies in a way that reflects their investment philosophy and client needs.
Focus on outcomes
Index-tracking strategies have matured into a core component of modern portfolio construction. Their value lies in the discipline and clarity they bring, particularly when used within an actively managed framework, rather than as part of a purely passive, static allocation.
For advisers, the opportunity is to move beyond outdated debates and focus on delivering well-constructed portfolios aligned to long-term client outcomes.
