Active managers see opportunities created by passive funds
While passive funds increasingly dominate ownership of and trading in stocks within the US S&P 500 Index, the resulting price distortions are creating opportunities for active managers.
Wednesday, March 18th 2026, 6:00AM
by Jenny Ruth
That’s the case for Nicholas Bagnall, founder and chief investment officer at the Te Ahumairangi fund, which invests solely in global equities.
“It can create opportunities to invest,” Bagnall says, explaining that stocks that exit the index tend to out-perform while those that replace such stocks in the index tend to underperform.
“There can be exaggerated price moves for stocks that are in danger of being out of the index or in danger of being included in the index.”
If one of those stocks reports a poor result, the resulting share price reaction can be particularly bad, and the Te Ahumairangi fund tends to do a significant amount of investing at that margin.
“We’re often finding value in companies that are outside of the index.”
The Te Ahumairangi fund manages a $1.2 billion fund for ACC and another $860 million for other investors.
In the US, roughly half of all managed fund and exchange-traded funds (ETFs) assets were held in passive vehicles by the end of 2025
Fisher Fund’s chief investment officer, Ashley Gardyne, says that ETF assets under management grew more than 30% in 2025 and surpassed US$19 trillion globally by year-end.
“By 2029, industry forecasters expect that number to approach US$30 trillion. In the US, roughly half of all managed fund and ETF assets are now in passive vehicles, and since 2010 approximately 80% of every dollar invested in US markets has flowed through just three providers: BlackRock, Vanguard, and State Street,” Gardyne says.
Active investment managers presenting to advisers at Pinnacle Investment Management’s equities roadshow in Wellington this week also see opportunities
“When it gets to the point where too much money becomes passive, the efficiency of markets is impaired,” said David Allen, head of long/short strategies at Plato Investment Management.
It means when a company reports either a small miss or a small beat on earnings forecasts, the action of the share price can be exaggerated because of the weight of money in passive funds.
That should mean opportunities for active managers when stock prices either over or under shoot underlying value, Allen said.
“We look at it as an opportunity – once they come into an index, a lot of funds will have to buy them” and that can mean “their prices are elevated beyond any logic,” he said.
“It’s a red flag for us.” The Plato Global Alpha Fund positions itself as 100% invested with 150% long positions and 50% short positions and which has outperformed the MSCI World Index since inception in 2006 by 12.69% per annum, delivering a 23.65% return since inception.
Allen says the fund has captured 61% of the downside but 129% of the upside.
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