Active-enhanced equity: Strengthen your core in a world of extremes

Passive equity strategies have become common building blocks for diversified portfolios. Their appeal is clear. They can provide broad market exposure at relatively low cost and with limited deviation from a benchmark.

But passive exposure to the broader market also comes with an opportunity cost: alpha, or potential outperformance relative to the benchmark.

That trade‑off may matter more when equity markets become more extreme.

Periods of intense technological or financial innovation can create unusually wide dispersion across individual stocks and investment factors. Market leadership can become concentrated. Investor behavior can also become more speculative as expectations for future outcomes begin to matter more than current fundamentals.

These conditions can create both opportunities and risks for core investors.

The challenge is how to pursue additional return without materially changing the risk profile of the allocation.

A well‑designed active‑enhanced equity strategy could help address that challenge. The objective is to pursue incremental alpha while maintaining broad diversification and benchmark‑aware risk.

When factors and fundamentals diverge

Periods of market extremes can create sharp differences between what company fundamentals suggest and how investment factors behave.

Recent factor returns illustrate how quickly leadership can shift across valuation, risk, quality, momentum, and growth.

These divergences matter because no single investment lens is likely to capture every opportunity or risk. Combining fundamental and quantitative perspectives can provide a broader view of the market and help investors navigate periods when outcomes become more dispersed or speculative.

These conditions reinforce the potential value of an active‑enhanced approach that combines independent sources of insight with disciplined risk control.

What makes an effective active‑core equity strategy?

Investors looking to get more from their portfolio’s core can choose from our growing range of active‑enhanced ETF strategies that seek to combine some of the advantages of active and passive investing.

We believe a strong risk‑managed core equity strategy should offer three characteristics.

1. Alpha potential

An active and repeatable investment process should be built on a source of edge or insight that creates the potential for excess returns across different market environments.

2. Managed, but active, risk

A low‑tracking‑error approach can help support consistency relative to a benchmark and limit exposure to unintended factor hot spots.

This can be particularly important when market concentration or extreme factor moves increase the risk of unintended portfolio exposures.

3. Competitive fees

A competitive ongoing charge can lower the drag on potential returns and improve the economics of using active management within a large core allocation.

For prospective investors, the critical question is whether the underlying investment engine can consistently generate benchmark‑plus returns while minimizing active risk.

Why modest alpha from a core allocation can matter

The core typically represents a significant share of an investor’s equity exposure.

As passive‑core allocations have grown, so has the opportunity to use this capital more effectively. Producing even a modest excess return from a core allocation can make a meaningful difference to long‑term outcomes.

In this instance, the frequency of outperformance is important to compounding value. When applied to a large base of portfolio capital over longer periods, the prospect of generating steady, if not necessarily heady, excess returns can be compelling.

How fundamental and quantitative insights can help in extreme markets

Market extremes can expose the limitations of relying on a single investment perspective.

We believe combining deep fundamental research with rigorous quantitative analysis can provide a broader opportunity set and a more disciplined way to assess risk.

Two recurring market inefficiencies help explain why.

Shrinking time horizons: As markets increasingly focus on short‑term outcomes, the resulting dislocations can create favorable risk and return opportunities for investors who focus on what creates value over the longer term.

Perspective skew: Markets can also struggle to weigh inside and outside views properly. The inside view uses the specifics of an individual situation to understand what is likely to happen. The outside view uses relevant historical precedents to understand the most likely outcome.

We believe an investment engine that combines these two distinct but complementary perspectives should be well positioned to pursue consistent, risk‑adjusted alpha across different market environments.

Fundamental research: The inside view

Fundamental research provides a forward‑looking view of individual companies.

Analysts with a deep understanding of company growth prospects, competitive positions, and industry dynamics should be well positioned to add value when uncertainty is high or when there is wide dispersion of returns within an industry or sector.

This inside view can be particularly valuable in fast‑changing areas such as artificial intelligence or biotechnology, where historical data may provide only a partial picture of how companies and industries could evolve.

A broad global research platform can also provide context across regions, allowing analysts to compare companies, business models, supply chains, and industry developments rather than considering individual companies in isolation.

Quantitative analysis: The outside view

Quantitative analysis provides an independent outside view.

Rigorous analysis of historical market and financial data can assess characteristics such as growth durability, business quality, capital deployment, momentum, and valuation across a broad investment universe.

This data‑driven perspective can help identify patterns, behavioral anomalies, and market dislocations that may be difficult to capture through fundamental research alone.

It can also help identify situations where factor behavior has moved away from company fundamentals, something that can become particularly relevant during periods of extreme market behavior.

With this design, performance is not dependent on a single lens or philosophy. It reflects two independent investment approaches that can be more powerful when combined.

Thoughtfully integrating fundamental and quantitative analysis can help reduce blind spots, challenge assumptions, and improve investment decision‑making across market cycles.

How benchmark‑aware alpha is built

Investment insight alone is not enough.

Portfolio construction determines how those insights are translated into active positions, how much risk each position contributes, and whether unintended exposures are building elsewhere in the portfolio.

This becomes particularly important when markets are concentrated or when individual stocks and factors experience extreme outcomes.

Risk‑managed active strategies seek to provide a similar risk profile to the benchmark while allowing diversified stock selection to drive relative returns.

By design, these strategies do not rely on large, concentrated positions. Instead, smaller overweight and underweight positions are spread across a broad universe of securities.

The sizes of these active positions, which are tightly controlled to limit tracking error, reflect the level of confidence in the investment thesis.

For a strategy that systematically integrates fundamental and quantitative analysis, conviction can reflect the convergence of the two approaches.

Overweight: Stocks where both the analyst and quantitative rating suggest a favorable risk and return profile.

Underweight: Companies whose fundamental and quantitative ratings appear less favorable.

Where the two approaches disagree, the portfolio can reflect that lower level of conviction.

Controlling individual position sizes is only one part of benchmark‑aware portfolio construction.

Managers also need to guard against unintended country, regional, sector, currency, or factor exposures. Risks can emerge when groups of stocks begin trading in a similar manner despite having different underlying fundamentals.

Some of these relationships may be driven by macroeconomic developments such as changes in interest rates, currencies, or economic growth expectations.

Others can emerge around popular investment themes or during periods of heightened speculation.

Managers supported by strong fundamental research and quantitative teams may be better positioned to identify and adjust to these evolving risk factors.

Balancing individual alpha opportunities with top‑down risk management requires constant vigilance.

In a world of concentrated indexes and more extreme outcomes, active choices and disciplined risk control need to coexist.

How active ETFs can fit within core equity allocations

The same Integrated Equity philosophy underpins our active‑enhanced equity ETF range.

Each strategy combines fundamental research and quantitative analysis with disciplined portfolio construction to pursue incremental alpha through diversified security selection, while seeking to maintain benchmark‑like risk.

The opportunity set and risk considerations differ by market, but the objective is consistent: help financial intermediaries use core equity allocations more efficiently through a benchmark‑aware, risk‑controlled approach.

For professional investors and clients navigating periods of greater market concentration, dispersion, and speculation, this approach can provide an active alternative or complement to passive equity exposure without fundamentally changing the role of the core.

Our active‑enhanced equity ETFs are designed to bring together fundamental insight, quantitative discipline, and benchmark‑aware risk control in a format that can be used within core client portfolios.