Key Takeaways
- • David Alloune, vice-president of asset allocation at Trans-Canada Capital Inc., told the 2025 Investment Innovation Conference (Canadian Investment Review) that a passive approach to the largest portion of institutional portfolios is "probably not an optimal solution."
- • Alloune proposed a portable alpha-inspired structure that splits the equity allocation into a passive benchmark-replicating building block and an active building block seeking returns above benchmark.
- • He said the average global equity long-only manager generated a 1.8 per cent excess return over benchmark in 2015, but on a rolling five-year basis the result in 2025 is below zero, meaning more than half of long-only managers are underperforming.
- • Alloune identified concentration risk from the Magnificent Seven technology stocks as a key reason passive-only global equity exposure is particularly risky.
- • The main obstacle, he said, is securing the willingness of investment committees to adopt this non-traditional approach, with implementation complexity manageable through good governance and fund structure.
Summary
David Alloune, vice-president of asset allocation at Trans-Canada Capital Inc., argued that institutional investors can add resilience and value by dividing a traditional active equity portfolio into two components at a time when active global equity strategies have struggled to outperform. Speaking at a session of the Canadian Investment Review's 2025 Investment Innovation Conference, as reported by Benefits Canada, he said that "a passive investing approach on the largest portion of institutional portfolios is probably not an optimal solution."
The approach is inspired by portable alpha. One building block replicates the portfolio's benchmark passively, isolating benchmark risk at low implementation cost, while the second takes active risk in pursuit of returns above the benchmark. Alloune said this structure uses fund capital more efficiently to build active risk and allows each risk to be managed on its own terms through the separation of beta and absolute return strategies within the total fund approach.
Alloune acknowledged implementation complexities, which he said can be addressed through good governance and fund structure. He identified the principal challenge as obtaining the willingness of investment committees to move toward this non-traditional approach. He also suggested that expanding the investable universe to include extension funds and equity long-short strategies can help prevent the erosion of alpha in global equities, since these strategies produce greater return dispersion than the long-only universe.
He cited rising concentration risk from the Magnificent Seven technology stocks as a reason a passive-only global equity approach is particularly risky. Using a data set constructed to evaluate long-only equity managers, Alloune said rolling five-year excess returns above benchmark are declining. The average global equity long-only manager generated 1.8 per cent above benchmark in 2015, while in 2025 the result is below zero, so more than half of these managers are underperforming their benchmarks.
The approach is inspired by portable alpha. One building block replicates the portfolio's benchmark passively, isolating benchmark risk at low implementation cost, while the second takes active risk in pursuit of returns above the benchmark. Alloune said this structure uses fund capital more efficiently to build active risk and allows each risk to be managed on its own terms through the separation of beta and absolute return strategies within the total fund approach.
Alloune acknowledged implementation complexities, which he said can be addressed through good governance and fund structure. He identified the principal challenge as obtaining the willingness of investment committees to move toward this non-traditional approach. He also suggested that expanding the investable universe to include extension funds and equity long-short strategies can help prevent the erosion of alpha in global equities, since these strategies produce greater return dispersion than the long-only universe.
He cited rising concentration risk from the Magnificent Seven technology stocks as a reason a passive-only global equity approach is particularly risky. Using a data set constructed to evaluate long-only equity managers, Alloune said rolling five-year excess returns above benchmark are declining. The average global equity long-only manager generated 1.8 per cent above benchmark in 2015, while in 2025 the result is below zero, so more than half of these managers are underperforming their benchmarks.
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