Passive vs. Active Overlap: Finding the Balance
A well-balanced portfolio isn’t just about picking good funds—it’s about ensuring each piece plays a distinct role. Ron McCoy and Freedom Capital Advisors are ready to help you fine-tune your active-passive strategy for precision performance.
The debate between passive and active investing has lasted for decades, but smart investors know the real challenge is finding the right balance. For high-net-worth clients, a well-crafted mix of passive and active strategies brings both the low costs of index funds and the outperformance potential of skilled managers. Ron McCoy’s approach is all about making sure portfolios stay diversified—without the hidden overlap that quietly drags down results.
Why Overlap Matters
It’s common for investors to hold passive index funds right alongside active funds that target the same stocks. This duplication waters down the value of active management and can bump up fees for no real benefit. Morningstar found that overlap between active and passive funds can cut outperformance by as much as 0.75% a year if you’re not careful.
Source: Morningstar – Avoiding Fund Overlap
Case Study: Redundant Holdings
A client with a $7 million portfolio found significant overlap between an S&P 500 index fund and a large-cap growth mutual fund. By reallocating some assets into a mid-cap value fund, they cut overlap by 60% and opened the door to new growth opportunities. The result: stronger diversification and better risk-adjusted returns over the next three years.
Key Strategies to Balance Passive and Active
1. Conduct Regular Overlap Audits
Use portfolio analysis tools like Morningstar’s Portfolio X-Ray to spot and eliminate holdings that cover the same ground in both index and active funds.
2. Differentiate by Asset Class or Style
Use passive funds for your core holdings (like the S&P 500 or total bond market) and active funds for less efficient or niche segments—such as emerging markets, small-cap value, or focused sectors.
3. Monitor Performance Attribution
Keep an eye on whether your active managers are actually delivering alpha, or just hugging the index. If they’re not adding value, consider shifting more to passive.
Actionable Tips for Investors
- Keep an Eye on Fees: Don’t pay for active management if you’re just getting passive returns.
- Think About Taxes: Place passive funds in taxable accounts for greater tax efficiency, and save active funds for IRAs or 401(k)s where you can defer taxes.
- Define the Role of Each Holding: Make sure every fund has a clear purpose in your plan, so you’re not doubling up on exposure.
Ron McCoy’s Expert Perspective
Ron’s thorough review process helps clients steer clear of overlap that can quietly drag down performance. By blending active and passive in a deliberate way, he builds portfolios that are both cost-efficient and positioned for smart, targeted outperformance.
