Why passive investing makes less sense in the current environment

SHOULD the vehicles that investors choose to place their money be a function of the investing environment? This question is not asked often enough by investment committees, which tend to focus on asset allocation issues, model portfolios and manager selection.

Yet it is a question that has become a lot more important for generating high risk-adjusted returns, particularly given the massive shift of money from active to passive investment strategies in recent years.

A simplified illustration of why this is the case comes from my student days. Armed with a Eurail-type pass, I travelled the European continent and, like many others, took advantage of the fixed menu offered by restaurants.