Active portfolio management is one of few professions for which worth is defined by a single phrase: risk-adjusted excess return. “Active” in professional equity investing does not mean merely ex-ante hard work against heady competition. Active also means that ex- post victory is expected and demands measurement.

In this paper, we perform an empirical examination of a dominant, decades-old victory metric: the capitalization-weighted index portfolio. We model the cycles of index dominance (inferiority) compared to alternative portfolios that differ by non-cap weighting schemes and by simulated active stock picking skills. We find that macroeconomic influences through monetary expansion/contraction and market interest rates correlate closely with the concentration of large constituents within the index. These cycles of concentration have major implications for the debate about active versus passive equity investing. One conclusion is that correct investor decisions to move into (or out of) benchmark alternatives to the cap-weighted benchmark are largely conditional on macro influences. Moving to (from) passive should be an active decision. Moreover, currently the current environment favors the choice of moving away from cap-weighted passive to alternatives.