Savvy investors are turning to strategies such as factor investing and returning to active management to enhance portfolio performance and mitigate risks, according to Carson Group’s “2025 Market Outlook.”

Factor investing focuses on key characteristics of securities, such as quality, value, momentum, volatility, size and yield, which influence risk and return profiles. These factors exhibit cycles, sometimes outperforming or underperforming depending on market conditions. However, over the long term, Carson Group noted that factors have proven beneficial for returns, even after accounting for risk.

A notable example, according to the report, is the combination of low volatility (stocks with minimal price fluctuations) and momentum (stocks with strong recent performance). This pairing provides a blend of defensive stability and offensive growth, yielding a risk-adjusted performance superior to benchmarks like the S&P 500.

The Role of Active Management

Although factor investing often replicates the benefits of active management at a lower cost, the report stated skilled active managers still have a vital place in portfolios, especially in fixed income.

“Active management typically struggles when market returns are mostly driven by very few stocks, like in 2023 and 2024,” said Sonu Varghese, a Carson Group vice president and global macro-strategist. “That’s because active managers typically hold more diversified portfolios, which is not helpful when concentration is rewarded—assuming you get the composition of the handful of stocks that are running up exactly right and have the wherewithal to sit with a concentrated portfolio that can potentially experience greater volatility and drawdowns.”

Varghese said if there is a broadening out of the market in 2025, as expected, active managers who have a good process of picking profitable and quality companies across the capitalization spectrum (large, mid, small) and style spectrum (value, core, growth) will potentially be rewarded.

“Any active manager who has outperformed over the last two years likely did it by being even more concentrated than the broad index, and it’s an open question whether that sort of concentration risk will be rewarded over the long term, especially if we have more volatility than we experienced in 2024,” Varghese said.

In fixed-income markets, replicating broad indices like the Bloomberg US Aggregate Bond Index is virtually impossible due to the vast number of bonds and their limited liquidity, the report stated. Active managers excel in navigating this terrain, selecting bonds worth owning and avoiding others. Notably, nearly two-thirds of active fixed-income managers in exchange-traded funds have outperformed their benchmarks.

ETFs are particularly appealing for active strategies, offering lower expenses and greater tax efficiency compared to mutual funds. Active management in fixed income has demonstrated its value in navigating recent market volatility, while active equity strategies are gradually gaining traction despite concerns about transparency and front running.

Positioning for 2025

Carson predicted that the investment landscape may present greater volatility this year, even as bullish sentiment remains pervasive. Over the past two years, the absence of a recession and the continuation of the bull market have allowed investors to generate excess returns through strategic asset allocation.

For 2025, combining factor-driven equity exposure and an emphasis on low volatility and momentum with actively managed fixed-income positions provides a robust framework for success, the report concluded. By prioritizing diversification, disciplined risk management and an adaptive approach, investors can better navigate uncertain markets.

The “2025 Market Outlook” was created by Carson’s research team, based on its own research and market predictions.