Return to Active Equity Management
October 13, 2025
“The S&P 500 is no longer a neutral decision, but an active bet,” argues PanAgora’s Eric Sorensen, in his latest paper, “Return to Active Equity Management,” published in The Journal of Portfolio Management this summer.
Investors in S&P 500 index portfolios are making the bet that its “persistent concentration” in a handful of large stocks, he explains.
This concentration is the result of excess liquidity in the capital markets, which in turn is the result of expansionary monetary polices. Easy money leads to what he terms “an index trade eruption,” when risk-averse investors shift from active strategies into index funds and risk-seeking investors simultaneously buy the largest positions in the index.
The upshot of this symbiotic trading is that largest stocks in the index receive a disproportionate amount of flows and their weightings increase significantly. When this happens, index returns are dominated by a few issuers, and the diversification provided by the benchmark declines.
Sorensen calculates that approximately half of the increase in concentration from 2021 to 2024 monetary expansion, combined with a rally in the long-term bond market that made stocks more attractive.
While the increase in concentration is particularly dramatic over the past few years, Sorensen notes that that there have been previous periods when monetary expansion has caused money to flow into the largest stocks, most notably during the dot-com bubble of the late 1990s.
In these environments, even the most skilled active managers will have difficulty outperforming the index. As Sorensen and his coauthors explain in an earlier paper,[1] criticism of active management is likely to increase during these periods.
But now is the time to return to active management, he concludes. A shifting macro environment increases the likelihood that market breadth will start to improve, “reasserting the long-run advantages of broad-based, skill-weighted active equity management.”
[1] Eric Sorensen et al., 2022, “Active versus Passive: Old Wine in New Wine Skins,” The Journal of Portfolio Management 48(3): 8–24.