Most managed fund fees in New Zealand go to actively managed funds, yet evidence consistently shows most active managers underperform their benchmarks over time. Here is how the two approaches differ and why the distinction matters for investors.
When money is invested through a managed fund, the manager faces a choice about how to select holdings. One approach involves researching individual companies, assessing industries, and making judgement calls about which assets are undervalued or likely to grow. The other involves holding a broad market slice in proportion to its size and doing no selecting at all. These are the two poles of active and passive management.
Understanding what each approach actually does — and does not do — helps explain why the two styles tend to produce different outcomes over time, and why the difference matters for the fees investors pay.
Active management
An actively managed fund employs analysts and portfolio managers who research companies, read financial reports, track industry trends, and make decisions about which securities to buy, hold, or sell. The goal is to beat the market — to generate returns above what a simple index would deliver.
This requires being right more often than wrong, and being right by enough to cover the higher fees that active management typically charges. Management fees for actively managed New Zealand managed funds often fall in the 0.8 to 1.5 percent range annually, on top of underlying investment costs.
Fund managers may focus on a specific region, sector, or asset class, and their individual skill is meant to be the variable that determines whether the fund outperforms.
Passive management
A passively managed fund aims to deliver the market return rather than beat it. It does this by holding all (or a representative sample of) the securities in a benchmark index in roughly the same proportions as the index itself.
If the NZX50 rises 5 percent over a year, a fund tracking that index should return close to 5 percent minus a small fee — typically much lower than an active fund, often in the 0.1 to 0.5 percent range for index funds and ETFs.
The assumption behind passive management is that markets are reasonably efficient — that at any given moment, stock prices already reflect everything publicly known about a company. If that is broadly true, then the extra returns from active management must come from skill or luck, and reliably identifying skill in advance is genuinely difficult.
Why fee differences compound
The effect of the fee gap between active and passive management compounds over time. On a balance of $50,000 over 20 years, a 1.2 percent annual fee difference might amount to tens of thousands of dollars in foregone growth — even if the active fund delivers the same return as the index before fees.
This is why some KiwiSaver members find themselves in actively managed options with higher fees, even when equivalent passive options are available within the same scheme. As RNZ has reported, one common question involves whether to stay in a default or actively chosen fund, and how fees factor into that decision.
What the performance data shows
Evidence on active management's track record is consistent and not flattering to the industry. Over most 10-year periods, the majority of actively managed funds in developed markets fail to beat their benchmarks after fees.
The pattern is particularly stark in efficient markets like the United States, where large US shares trade on exchanges with millions of participants. It is somewhat less pronounced in smaller, less liquid markets — New Zealand's NZX, for instance, is thin enough that active managers may have marginally more opportunity to find mispriced assets.
For New Zealand investors, the interest.co.nz market data tracking the NZX50 shows regular fluctuations in individual company share prices, as in recent weekly summaries, illustrating the kind of short-term price movement that active managers attempt to exploit — with results that, over time, mostly do not justify the additional cost.
What passive does not solve
Passive management removes the skill question but does not eliminate market risk. A fund tracking the NZX50 falls when the NZX50 falls. There is no cushion, no defensive positioning, no sidestepping a broad market decline.
The appeal of passive investing is not that it avoids losses but that it ensures investors receive the return the market offers, rather than underperforming it through poor timing or selection — and that it does so cheaply.
For most long-term investors — particularly those contributing regularly through KiwiSaver — the fee advantage of passive options tends to be more significant over decades than the possibility of an active manager beating the market by enough to offset what they charge for the attempt.
This article is for general information only and is not personalised financial advice. Seek advice from a licensed financial adviser (registered on the FSPR) for guidance specific to your situation.