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Active Versus Passive Investing

Written: 13 May 2022

Author: Jono O'Grady

4 min read

Imagine you’re flipping sausages around the BBQ on Saturday afternoon, and you hear the question: ‘what is better, active investing or passive investing?’ It’s one of the age-old questions within the investing arena. How do you answer it?

At Flint we can’t answer this question, in fact we’re not sure that it is answerable! Ultimately every investor needs to make their own informed decisions. So, if you’re wondering what the difference is between active and passive investing into managed funds, and some of the pros and cons, then read on!

How a managed fund works

Let’s start by talking about how a managed fund works. In Australia you might hear them called ‘AUTs’ (Australian Unit Trusts), in other markets you might hear them called ‘mutual funds’ – in New Zealand we call them ‘managed funds.’ With a managed fund, your money is pooled together with money from other investors, meaning that everyone owns part of the fund. The fund will have specific rules about how the fund is managed and the types of investment that it invests in. It is the job of the fund manager to pick the right investments as per the objectives of the fund. Most KiwiSaver funds are ‘managed funds,’ either actively or passively managed. We discuss this in our article on KiwiSaver investing habits if you’re interested in a deeper read.

What is Passive Investment Management?

The FMA has a great summary on their website where they explain passive management:

‘Passive managers simply aim to mirror or “track” their chosen index, making decisions to buy or sell based on how the entire market looks at any one time. For example, if the market has 1% of a certain asset, a passive fund will hold 1% too.

Known as “index-tracking”, it’s easier with new technology and less expensive than active management, meaning lower fees.’

A market index tracks the performance of a chosen group of assets. In New Zealand, a well-known investment index is the NZX50. This is a grouping of the 50 largest companies listed on the New Zealand Stock Exchange (NZSX). It can be much easier to follow a group of companies rather than a whole stock exchange, and it provides a market benchmark for making comparisons with ‘the market.’

What is Active Investment Management?

It's all in the name really! The FMA offers this explanation of active investment management:

Active managers aim to outperform their chosen index, typically by buying assets they deem undervalued or selling those they believe are overvalued, or by favouring certain assets or sectors over others in response to market conditions or expectations. They base their decisions on research, forecasting and expertise, all of which can be costly. There are no guarantees they will perform better than their chosen index.’

When you purchase an actively managed fund, you rely on the expertise and experience of the fund manager managing the investment fund to beat the index. For some DIY Investors this may be a good approach and lead to confidence knowing that an expert is in charge. It is always important, however, to do your own due diligence on any investment including reading through the Product Disclosure Statement (PDS) on each fund. Many PDS documents have information on the team who manage the fund and their experience.

Summary of active versus passive

The FMA follow on with this useful summary table of active management versus passive management:

As you can see, managers that take an active approach are more hands on. They focus on picking the right investments for you. You rely on their professional experience to pick the investments in the fund. While this can create a higher return than the market, an active approach to funds management usually involves a higher fee from the fund manager. Managers that take a passive approach seek to mirror the behaviour within the index in a more hands-off, generally automated way. This automated approach can lead to lower fund manager fees. We’re not wading into a fee discussion for you here, but recommend you seek to be informed and make your own decisions. There is more things to consider than just fees when deciding where to invest – it is important to look at long term fund performance and how a fund will sit as part of your investment strategy and portfolio.

What should you pick?

Back to our original question – what is better, active investing or passive investing? The answer is it very much depends on your own personal preferences and overall financial plan. There are pros and cons of either approach or even taking the middle route and investing in both! Christopher Walsh, the founder of the consumer website ‘MoneyHub’ has this to say about investing in actively managed and passively managed funds:

"There is ongoing confusion around investing approaches in actively managed and index (passive) funds. However, it's not complicated - you can be a responsible investor by choosing both active and passive funds. What's more, it's arguably more strategic as you diversify risk in both the short-term and long-term".

"If you invest in many index funds, you are exposed to local and global markets. However, this runs the risk of missing out on opportunities that an actively managed fund manager may spot and invest in. For example, an active fund manager may invest in the next Mainfreight, Apple or Xero at $1 and see your holding go up 100X. Passive funds generally don't seem to focus on small-cap companies, so there isn't usually an opportunity to benefit from such upside. This is why diversification can be worthwhile".

Next steps

Flint has many different investment funds available by different fund managers – some of them are actively managed and some of them are passively managed. When it comes to investing, it’s up to personal preference and your individual choice as to whether you select active funds, passive funds, or both as part of your portfolio. Our role at Flint isn’t to provide advice or weigh into the active versus passive conversation. We’re simply here to provide commentary and information so you can assess alternatives and make your own, informed decisions.



All content shared is of a general nature, current to the time it was penned, and is not financial advice. Before making any investment decisions, please be sure you have completed full due diligence. This should include reading the product disclosure statement (PDS), considering fees and taxation, identifying your time horizons, and understanding the performance history and reputation of the investments you are considering.

Please note: When investing you are not guaranteed to make money (and on occasion you may lose some or all of the money you began with). Seek independent advice to establish if an investment is suitable for your financial situation and long-term wealth generation goals.