Passive Investing vs Active Investing - The Definitive New Zealand Guide
Our New Zealand-specific guide outlines the difference between passive and active investing, market-leading and low-fee passive and active investments as well as, answering frequently asked questions.
Updated 2 December 2021
New Zealand investors have begun to question whether “passive” or “active” is the best approach for their needs in recent years. Up until the launch of Simplicity, most KiwiSaver schemes were actively managed. However, the rise in passive players has led to various investing publications becoming part of an "active versus passive" investing debate such as this Stuff article and this Financial Markets Authority release.
What's the difference, and why does it matter?
To help make sense of the matter and give you insights and awareness of must-know facts about how to invest, our guide covers:
What's the difference, and why does it matter?
- Active investments are funds run by investment managers who try to outperform an index over time, such as the S&P 500 or the NZX50. To do this, fund managers actively buy and sell shares, which increases the costs of running such a fund. Fool.com's trusted summary of the subject is a useful guide to help you understand further. Examples of active managers include Milford Asset Management, Booster and Pie Funds.
- Passive investments, on the other hand, invests to match a specific index, for instance the S&P/NZX 20, rather than picking shares based on the fund manager’s choice. An index fund can outperform an active fund in the short term and the long-term. Examples include Simplicity, Kernel Wealth and Smartshares. Our guide to index funds has more details.
- Active investing also means buying shares using a DIY platform such as Sharesies, Hatch or Stake. Such activity is not covered in our guide as we focus on managed funds - our guide to investing in shares is a good place to start.
- While passive and active investing strategies both have unique advantages and disadvantages, the low fees charged by passive investment products has seen a growth in index and ETF products in recent years.
- On the other hand, actively managed funds tend to underperform their passive peers after fees have been taken into account.
- Globally, more and more money is going into passively managed funds, per Morningstar research.
To help make sense of the matter and give you insights and awareness of must-know facts about how to invest, our guide covers:
MoneyHub Founder Christopher Walsh shares his comments on active vs passive investing
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"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, a 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". "However you decide to invest, I do suggest reading this guide carefully and considering your options closely. It has never been cheaper or more transparent to invest in an active or passive fund". |
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Disclaimer: This list does not constitute financial advice, and the funds listed below are included based on their short-term performance, fees, structure and, where possible, their longer-term performance. Our guide is journalistic in nature, and we stand by our shortlist with the purpose of sharing ideas to help readers with their research. There is no "best active fund", "best passive fund" or "best (overall) fund" - this is simply an exercise to raise awareness on the different benefits of active and passive investments.
Advertising Disclosure: We include the funds below based on merit, although we may have commercial arrangements with specific innovative and market-leading investment managers for general promotion. Our Advertising Policy has more details. We rely on Morningstar data for all fund returns information.
Advertising Disclosure: We include the funds below based on merit, although we may have commercial arrangements with specific innovative and market-leading investment managers for general promotion. Our Advertising Policy has more details. We rely on Morningstar data for all fund returns information.
What’s the Difference Between Passive and Active Investing?
Know this first: Fool.com, an investing authority, highlights some critical must-know facts:
What does this mean for my investment decisions?
- Firstly, an actively managed fund must outperform its benchmark index by at least enough to justify the fund's above-market fee.
- In the U.S., returning above-market returns continues to be a big challenge.
- Specifically, 71% of large-cap U.S. actively managed funds underperformed their S&P 500 benchmark in 2019. And, in the five years to 2019, 81% of large-cap, active U.S. funds underperformed their benchmarks.
What does this mean for my investment decisions?
- In summary, the choice is yours - both passive funds and active funds have unique pros and cons. What matters is that you understand what you're investing in and believe it will deliver returns in the long-term.
- No research has been undertaken in New Zealand, given the recent arrival of passive investment funds. However, no matter than the markets or fund manager is doing, actively managed funds cost more than passive funds.
- Our table explains the key features, advantages and disadvantages of both passive and active investments below:
Investment Type |
Key Features |
Advantages |
Disadvantages |
Passive Funds |
Designed to follow the performance of a specific index (i.e. NZX50, S&P 500) The buy/sell process is automated and streamlined, without employed investment managers Usually the fees are lower (relative to active investments) |
Passive funds don't employ investment managers, so the fees are lower than active funds. These differences add up over time. Fund fees start from as low as 0.10% p.a. (Simplicity Investment Funds), unrivalled by any actively managed fund. Passive funds can outperform active funds; for the 12 months to 30 June 2021, many SuperLife KiwiSaver (index and sector) funds outperformed most actively managed growth funds. |
Passive funds will never outperform a market or sector benchmark - they're designed to replicate (i.e. match) the performance. |
Active Funds |
Designed to beat the returns of a specific index (also called a benchmark) Employ skilled investment managers and analysts to decide what shares to buy and sell Usually have higher expenses (relative to passive investments), which can reduce the overall performance |
Good active funds can outperform the market in the short and long term. You're hiring professional investors to make your money work for you, backed by a team of analysts. Investors wanting to invest in sector and theme funds (i.e. emerging markets, clean energy, technology, etc.) can prefer active management given the perceived volatility (versus following a lower-risk index fund). |
There's no guarantee an actively managed fund will beat an index or benchmark, and many don't. The fees charged are higher than passively managed funds, lowering the potential returns. Some fund managers charge performance fees on top of the management fee. |
What is Best – Passive or Active Investments?
- Our view is that you can have both. As part of a standard diversification model, it is arguably prudent to have a mixture of investments that employ both investing strategies.
- For example, you may have your KiwiSaver with an actively managed growth fund (with Milford, Fisher and Booster being some of the largest non-bank providers). Adding to this, you may invest with an index fund manager (for example, Simplicity Investment Funds, Kernel Wealth etc.), buy ETFs (such as Smartshares or US-based ETFs using Sharesies, Hatch or Stake), and/or make regular contributions to ETFs, index and/or active funds via InvestNow.
- If you're looking for green-approved funds, most ethical investments are actively managed. This means a “passive only approach” would exclude you from many top-performing ESG funds. Our Ethical KiwiSaver guide has more details, as does our Kernel Review which offers several ethical index funds.
- It's arguable (and logical) that a portfolio comprised of selected solid-performing investments, both active and passive, is a reasonable approach. It also means there are no limitations to opportunities and returns as all options are available.
To help raise awareness about top-performing fund managers, both active and passive, we list popular KiwiSaver and non-KiwiSaver options in the section below.
Popular Active and Passive KiwiSaver and Managed Funds
We have focused on growth funds, as this is more relevant for understanding active vs passive investing. Our data is drawn from Morningstar and the investment managers and funds are not a recommendation. This list does not constitute financial advice in any form.
1. Popular Passive Investing KiwiSaver Schemes
While many SuperLife funds continue to top performance tables in 2021, past performance is no guarantee of future performance.
We outline top-performing managers below:
We outline top-performing managers below:
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2. Popular Active Investing KiwiSaver Schemes
The schemes below have many things in common - they have solid performance history, have an easy-to-understand growth fund and are not managed by a bank.
We outline top-performing managers below:
We outline top-performing managers below:
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3. Popular Passive Investing Fund Managers (and ETFs)
Passive managed funds have not been operating in New Zealand for as long as the likes of Milford, Fisher and Pie Funds, which each have 10+ years of fund performance data. However, this will change over time.
We outline top-performing managers below:
We outline top-performing managers below:
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4. Popular Active Investing Fund Managers
Our list below is drawn from our Managed Funds guide and/or 5- year Morningstar data. As a point of reference, for the five years to 31 October 2021, 15 out of the 20 top-performing managed funds in New Zealand were managed by Fisher, Milford, Pie Funds or Harbour. You can see the latest results here.
As outlined above, please keep in mind, locally-managed passive funds are relatively newly available to investors in New Zealand. In time, when the funds from managers like Kernel and Simplicity have longer performance data, we will be able to make better comparisons between active and passive managed fund performance.
We outline top-performing managers below:
As outlined above, please keep in mind, locally-managed passive funds are relatively newly available to investors in New Zealand. In time, when the funds from managers like Kernel and Simplicity have longer performance data, we will be able to make better comparisons between active and passive managed fund performance.
We outline top-performing managers below:
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Frequently Asked Questions
Do active funds outperform passive funds, or is passive investing better than active investing?
Fool.com sums this up best - research shows that relatively few active funds can outperform the market. Even if an active manager performs as well as the market, they need to exceed the market returns to pay the higher fees charged as part of active management.
In 2020 and 2021, we saw many index funds and ETFs outperform actively managed KiwiSaver and investment funds. Still, we argue that solidly performing and robust active and passive funds are equally valuable in any investment portfolio and can coexist comfortably. This means, for example, an investor may have a selection of NZ and US-listed ETFs as well as an actively managed growth-based KiwiSaver fund.
In 2020 and 2021, we saw many index funds and ETFs outperform actively managed KiwiSaver and investment funds. Still, we argue that solidly performing and robust active and passive funds are equally valuable in any investment portfolio and can coexist comfortably. This means, for example, an investor may have a selection of NZ and US-listed ETFs as well as an actively managed growth-based KiwiSaver fund.
What are the pros and cons of active and passive investing?
This is outlined in the table above.
Is active investing riskier?
Yes, in most cases, owing to the fact active investments cost more to operate and therefore need to make higher returns to be profitable. Thus, the risk of them underperforming is higher than passive investing, given the added costs.
Secondly, active investments aren't as diversified as passive investments because the investing team would be spread too thin (i.e. managing hundreds of different shares).
Lastly, active investing requires you to trust the manager. But the manager (and/or a critical team member) may change jobs, retire or make bad decisions. This isn't an issue with passive investment products but creates added risk for anyone investing in actively managed products.
Secondly, active investments aren't as diversified as passive investments because the investing team would be spread too thin (i.e. managing hundreds of different shares).
Lastly, active investing requires you to trust the manager. But the manager (and/or a critical team member) may change jobs, retire or make bad decisions. This isn't an issue with passive investment products but creates added risk for anyone investing in actively managed products.
Are ETFs passively managed?
In most cases, yes. But not always - there is a selection of US-listed ETFs that have active management. However, in the case of Smartshares, which offers New Zealand Dollar-denominated ETFs, all the ETFs offered are passively managed. Our ETFs guide has more details.
Related Guides
Reviews:
- Index Funds
- Favourite KiwiSaver Funds
- Favourite Managed Funds
- Active or Passive Investing (External Guide by Kernel Wealth)
- Ethical Investing and ESG Funds
- How to Read a Morningstar KiwiSaver Report
- How to Use the Morningstar KiwiSaver Tool
- How to Use the Morningstar Managed Funds Tool
Reviews:
