Passive investing has created large valuation gaps that active managers should be exploiting, but most are too constrained by benchmarks to take advantage, according to a panel of fund managers.
Fabio Di Giansante, European equity portfolio manager at DNCA Finance, said the rise of passive flows has opened opportunities for stockpickers.
“Markets can move quickly and indiscriminately, creating opportunities for active managers,” he said.
The opportunity is particularly acute given the concentration in US indices. The S&P 500 is now dominated by a handful of names, with 10 companies representing 40% of the index.
That has pushed investors to look elsewhere, particularly to Europe, where equities trade at a 30% discount to the US on price-to-earnings and around 45% using cyclically adjusted measures.
Daniel Nicholas, client portfolio manager at Harris Associates, noted that his firm's global portfolio holds 49% in the US versus 72% in the MSCI World benchmark.
“Because of concentration, this is a good opportunity to diversify,” he said. “There are 150 US stocks trading below 14x earnings. Some deserve to be cheap, many do not.”
Exploiting those gaps also means rethinking how stocks are categorised. Nicholas said his firm views growth as a characteristic rather than a category. “We look for businesses trading at a discount to intrinsic value, regardless of style,” he said.
He pointed to Salesforce as an example, which value-driven Harris Associates managers are buying again despite it being considered a growth name. “The market fears AI will reduce demand for software, but we believe AI enhances the value of enterprise data,” Nicholas said.
Karen Kharmandarian, chief investment officer of thematic equities at Mirova, agreed. “Growth versus value is less relevant than valuation relative to growth and visibility,” he said.
Even in technology, a sector often dismissed as expensive, some companies now offer attractive valuations after a period of compression, he said.
Di Giansante noted the distinction between growth and value is increasingly blurred, with stock selection mattering more than style buckets, “especially as AI creates winners and losers within sectors”.
In Europe, many companies are exposed to AI as enablers – such as electrical equipment, capital goods and semiconductors – but valuations are already high in the most obvious names. Opportunities exist where AI exposure is not fully priced, such as traditional semiconductors or industrial gases.
That makes passive strategies less effective and stockpicking more important, but only if active managers are willing to act with conviction. Nicholas warned that most active strategies fail because they are too timid. “Success comes from conviction,” he said. “The challenge is avoiding dilution from low-conviction positions driven by benchmark constraints.”
Many active managers hold positions simply to avoid deviating too far from their benchmark, which dilutes the impact of their best ideas. “You need to look different from the benchmark and hold positions long enough to realise value,” Nicholas said.
Harris typically holds positions for three to five years, allowing time for intrinsic value to be recognised.
Kharmandarian drew a distinction between rules-based and discretionary strategies. Exchange-traded funds (ETFs) are suitable for broad exposure, he said, but active management is better suited to accessing under-researched opportunities, particularly in mid- and small-cap stocks.
Di Giansante agreed that the opportunity set is broader here than in large-caps. Europe has many mid-sized companies exposed to structural trends such as AI adoption and manufacturing reshoring, but these are often overlooked by passive strategies.
“Europe also benefits from being an AI adopter,” he said. “Companies can improve efficiency significantly, particularly in sectors like banking and healthcare.”
In banking, AI could drive meaningful improvements in returns, although not uniformly across institutions. In healthcare, AI can reduce costs and improve outcomes. These are examples where stock selection matters more than sector allocation or style tilts.
European equities have delivered strong returns over the past three years and remain cheaper than their US counterparts, although the discount to American equities has narrowed. Di Giansante noted that Europe is no longer cheap in absolute terms, but the gap to the US remains wide.
Nicholas added that European high-quality companies, which outperformed from 2009 onwards, sold off in 2024 and 2025 and are “now cheap again”.
The outlook for earnings also supports a more balanced global allocation. Wall Street was expecting 7% earnings growth in Europe in 2026 but now forecasts 11%, Nicholas noted.
The US is still expected to outgrow Europe but the valuation discount on the continent is too wide to justify the current allocation skew.
“Active management can increase returns and reduce risk,” Nicholas said. “Over the long term, active strategies can outperform if they are truly differentiated and patient.”