Active vs passive investing remains a key debate for KiwiSaver and investment fund investors. A fairer comparison reveals where manager skill matters.
Around 80% of active fund managers fail to beat their benchmark. It’s one of the most quoted numbers in investing, and it’s usually wheeled out as though it ends the conversation.
It doesn’t.
The number often emanates from SPIVA, S&P Indices Versus Active, a scorecard S&P Dow Jones Indices has produced since 2002, comparing actively managed funds against market indices across countries and time periods. It’s become the passive camp’s go-to piece of evidence.
That statistic tells us active management is hard, and that investors need to be selective about who they back. It doesn’t tell us that skill doesn’t exist, or that passive is automatically right everywhere. Flip the number around, and a meaningful group of managers do beat the market, consistently enough to show up clearly in the data. The real question isn’t whether active management works. It’s how to find the managers who make it work, and that starts with a fairer test.
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Why benchmark comparisons can be misleading
SPIVA’s approach, like most of the data in this debate, compares active funds against a costless, theoretical benchmark, not something any investor can actually buy. That’s a bit like judging a runner against the world record rather than the field they were actually racing.
That’s not the only wrinkle. The design choices behind these scorecards are generally sensible, but they do influence the headline result.
Take survivorship bias. Funds that close or merge are typically treated as underperformers for the periods they didn’t survive, helping avoid the common mistake of only measuring the winners. That’s a reasonable adjustment. But it can also capture funds that closed for reasons unrelated to investment performance.
Weighting matters too. Most scorecards count each fund equally, regardless of whether it manages $5 million or $50 billion. That means dozens of small niche funds can have the same influence on the result as a handful of managers overseeing the bulk of investors’ money.
Benchmark selection introduces another challenge. A broad index has to stand in for an entire category, yet not every manager in that category is trying to mirror that benchmark. Differences in hedging, sector emphasis or geographic exposure can all create a mismatch between what a fund was designed to do and what it’s ultimately judged against.
Categories themselves can blur important differences. Style-specific, sector and thematic funds are often grouped together with broad active managers and measured against a single benchmark, creating a neat headline result from strategies that were never attempting to achieve the same objective.
What New Zealand global equity funds reveal
A recent New Zealand example illustrates the point. Earlier this year, SPIVA reported that roughly 90% of New Zealand-domiciled active global equity funds had underperformed its chosen benchmark over the previous three years. But a separate analysis found that 86% of New Zealand-domiciled passive global equity funds also underperformed the same index over a similar period, with most lagging by more than 1% a year.
The reason is simple: neither group was actually managing against that benchmark. Most New Zealand global equity funds, active and passive alike, use broader or differently constructed indices, often including ESG exclusions, different geographic exposures or varying hedging approaches.
If both active and passive funds fail the same test in similar numbers, the more useful question may not be why fund managers underperformed, but whether the benchmark was the right measuring stick in the first place.
None of these issues invalidate the conclusion that active management is difficult. They simply remind us that the often-quoted 80% figure is the product of a particular methodology rather than an immutable law of investing.
A fairer test of active versus passive fund management
Morningstar’s Mid-Year 2026 Active/Passive Barometer, released in August, offers exactly that. It compares active funds against an asset-weighted composite of real, investable passive funds in the same category, fees deducted on both sides, across more than 9000 US funds and close to US$29 trillion, roughly two-thirds of the US fund market.
On that basis, just over 40% of active funds beat their passive peers over the year to June 2026, up seven points on the year before. Success varied sharply by category, but it was only 27% in US large-cap shares, the most efficient, heavily researched corner of the market. Even there, more than one in four managers cleared the bar in the toughest arena in global investing. The lesson: “active versus passive” isn’t one contest with one outcome.
A fund near the top of a quarterly ranking may simply have had one good bet or a favourable currency move. A capable manager can just as easily have a weak year. Longer periods tell a more honest story, and a decade spanning genuinely different market environments is a better test than one favourable stretch.
Think of it like sport. One podium finish tells you a competitor had a good day. A decade of repeatedly finishing near the front of the field suggests something more durable. Investing is no different.
The managers worth paying for aren’t necessarily those with the single highest return over one period, but those who keep producing competitive outcomes as market conditions change.
Why long-term investment performance matters
Morningstar, the global fund research and ratings provider, makes a similar point in its research on rolling returns. A manager can look exceptional when measured from one particular start date and one particular end date. The more demanding test is what happens when the measuring window keeps moving.
That’s why rolling 10-year results can be so valuable. They provide dozens of overlapping tests rather than one, helping distinguish repeatable skill from fortunate timing.
It’s a test New Zealand’s own market has an answer for. Looking at 10-year returns among local managers, five of the six most consistent performers are active managers, with the remaining fund (in fourth place) using a hybrid model that blends active decisions with passive implementation. That consistency suggests skill can still play an important role in investment outcomes.
That’s particularly relevant for KiwiSaver investors, whose retirement outcomes will be shaped not by winning a philosophical argument about active versus passive management, but by whether the managers they choose can consistently deliver results over decades rather than quarters.
How active and passive investing work together
It’s often said that active investors provide price discovery, and that’s true. But what does that actually mean?
An index doesn’t decide whether a company’s shares are attractive, expensive or risky. It simply follows a rules-based formula. If a company’s market value rises, its representation in the index rises too, regardless of whether that valuation is justified.
Active investors approach the question differently. Their job is to assess businesses, challenge consensus views, identify mispricing and decide whether a share price reflects reality. Their collective decisions help establish the prices at which all investors, including passive funds, ultimately transact.
In that sense, passive and active investing are not opposing systems. They’re complementary ones. Passive investors benefit from the research, analysis and trading decisions of active investors, while active managers benefit from the low-cost market access passive vehicles help provide. The ecosystem works because both groups participate.
There’s also a common misconception that passive investing means taking no view at all. In practice, many passive funds carry very real, if implicit, bets built into their design.
A market-capitalisation-weighted index automatically concentrates more money into whichever companies have grown the largest, regardless of whether that concentration still makes sense from a risk or valuation perspective. Today’s major global indices are a good example. A handful of mega-cap technology companies now make up an unusually large share of total index weight. An investor buying that index isn’t taking “no position” on those companies. They’re making a concentrated bet on continued strength in a small number of names, whether they intended to or not.
The same applies to narrower or thematic passive products, sector ETFs, single-country funds, or indices built around a specific style or trend. These aren’t neutral market exposure either. They’re an explicit positioning decision, just one made by the index’s construction rules rather than a manager’s judgment. The difference isn’t that passive avoids taking bets and active doesn’t. It’s that active bets are made deliberately and can be adjusted, while passive bets are a byproduct of an index formula and stay in place until the index itself changes.
There’s a similar distinction in stewardship. Large passive managers do vote and engage with boards, but an index fund generally can’t sell a company just because it disagrees with its strategy or governance, so long as that company remains in the index it’s built to replicate. An active manager can vote, engage, trim the position, avoid the company, or simply sell and walk away, a lever passive strategies don’t have.
What KiwiSaver and investment fund investors should consider
Taking on more active risk doesn’t automatically mean more reward. Schroders’ research on global large-cap managers found the median added 0.5-1% a year above benchmark over 10-20 years, top quartile managers 1.5-2%, and the top 5% up to 3-4%. But strategies with high ‘tracking error,’ deviating a lot from the index, didn’t get compensated for that extra risk on average. Fewer than half beat their benchmark. Tighter, more disciplined managers delivered the better risk-adjusted results.
Passive funds remain a sensible way to get broad, low-cost exposure. But the more compelling opportunity often lies with carefully chosen active managers, in the categories and conditions where genuine skill has room to show, and the evidence increasingly suggests those odds are less lopsided than the well-worn 80% statistic implies.
The real challenge was never whether skill exists. The challenge is identifying where skill is most likely to be rewarded, and then finding the managers who can consistently convert that opportunity into results.