Active and passive investments: what's the score?


Active or passive investments – what’s the score?


If you are considering managed funds as an investment, this is a summary of the features and investment performance of active compared with and passive (index-style) investment options.


Active investments

While actively managed assets can play an important role in a diverse portfolio, investors often do best using passive investments for the bulk of their holdings. Nevertheless, active managers may offer special insight into particular companies, and less well known sectors of the market. And the big issue is still whether you believe in trying to beat the market or whether you believe in minimizing costs.

Active advantages

  • Flexibility : active managers, unlike passive ones, are not required to hold specific stocks or bonds
  • Hedging:  the ability to use eg short sales, and other strategies to insure against losses
  • Risk management : he ability to get out of specific holdings or market sectors when risks get too large
  • Tax management: including strategies tailored to the individual investor,


Passive ( index-style ) investments

Passive investments buy and hold shares or bonds in a market index eg Standard & Poor’s ASX 200 or the Dow Jones Industrial Average. There is an increasing number ofexchange-traded fund (ETFs) passive investment funds available.which can track

·       the broader market or

·       narrower sectors such smaller companies, bonds and industry-specific stocks .


Passive strengths

  • Very low fees -- since there is no need to analyze securities in the index
  • Good transparency -- because investors know at all times what stocks or bonds an indexed investment contains
  • Tax efficiency -- because the index fund’s buy-and-hold style does not trigger large annual capital gains tax.



The SPIVA Australia Scorecard reports on the performance of actively managed Australian funds against their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons


SPIVA evaluated the returns of

·       697 Australian equity funds (large, mid, and small cap, as well as A-REIT ( real estate investment trusts),

·       343 international equity funds and

·       83 Australian bond funds.



·       In 2016 ,the majority of Australian funds underperformed their respective benchmarks (or target performance)

·       Most Australian funds consistenly failed to beat their relevantbenchmark indices over the long-term


Active funds

Over 10-yearsto 31 December 2016

·       more than 80% of international equity and Australian bond funds and

·       more than 70% of Australian general equity and A-REIT funds

underperformed their respective benchmarks.

Australian General Equity Funds


In 2016, the S&P/ASX 200 gained 11.8%



·       Australian large-cap equity funds posted an average return of 9.2%

·       76% of these funds underperformed  the S&P/ASX 200

·       Over the 5- and 10-year periods, 70% and 74% of funds in this category underperformed the benchmark, respectively.

Elizabeth HattonActive