Active vs passive is one of the most consequential investment decisions NZ investors make — and the evidence on it is unusually clear.
The global evidence consistently shows that the majority of actively managed funds underperform their benchmark index over 10+ year periods, after fees. In NZ, the data is similar. For most investors, a low-cost index fund (passive) will outperform the average active fund. There are active fund exceptions — Milford is frequently cited in NZ — but past outperformance is not reliably predictive of future outperformance.
What Is Passive Investing?
Passive investing means tracking a market index rather than trying to beat it.
- Index fund or ETF that holds the same companies as an index (e.g., NZX 50, S&P 500, MSCI World)
- No research team trying to pick winners — just replicate the index
- Low cost: typically 0.05%–0.25% p.a. in NZ
- Returns mirror the market return, minus the fund fee
What Is Active Investing?
Active investing means fund managers research individual companies, try to identify mispricings, and construct a portfolio designed to outperform the benchmark.
- Research team, analysts, portfolio managers
- Higher cost: typically 0.80%–2.00% p.a. in NZ
- Goal: beat the benchmark index over time
The Evidence Against Active Management
SPIVA Report (S&P Dow Jones Indices)
SPIVA tracks the percentage of active funds that underperform their benchmark after fees. Results are published annually for multiple markets including Australia (closest to NZ).
| Period | % of Australian active funds underperforming benchmark |
|---|---|
| 1 year | ~55% |
| 3 years | ~70% |
| 5 years | ~80% |
| 10 years | ~85% |
| 15 years | ~90% |
The longer the time horizon, the worse active fund performance becomes relative to the index. The compounding effect of higher fees becomes more pronounced over time.
The fee mathematics
If an active fund charges 1.5% p.a. and a passive fund charges 0.20%, the active fund needs to generate 1.3% more return every year just to break even. Over 20 years:
| $100,000 invested, 8% gross market return | 20-year value |
|---|---|
| Passive fund (0.20% fee) | ~$437,000 |
| Active fund (1.50% fee) | ~$349,000 |
| Difference | $88,000 |
The active fund must consistently outperform by 1.3% p.a. — before tax — just to match the passive fund’s after-fee result.
NZ Active Funds: Who Has Outperformed?
Milford Asset Management
Milford is the most cited example of a NZ active fund manager that has delivered consistent outperformance. Milford Active Growth, their flagship fund, has historically outperformed its benchmark over 5 and 10 year periods.
Important caveats:
- Past outperformance does not guarantee future outperformance
- Milford’s fee is approximately 1.05%–1.10% p.a. — significantly above passive alternatives
- As Milford’s funds under management have grown substantially, outperformance tends to be harder to maintain (harder to find underpriced opportunities when managing billions)
- Their strong performance period includes some market conditions that favoured their approach
If you are going to consider an active fund, Milford is probably the strongest NZ candidate. But the evidence that past outperformance predicts future outperformance remains weak globally.
Fisher Funds and others
Other NZ active managers (Fisher Funds, Booster, AMP) have more mixed track records. Long-run performance relative to appropriate benchmarks has generally not supported the fee premium.
When Active Investing Might Make Sense
Despite the statistical evidence, there are arguments for active management in specific contexts:
1. Niche markets where information is truly inefficient
Small-cap NZ or Australian shares may be less efficiently priced than the S&P 500 or MSCI World. An active manager with genuine local expertise may be able to exploit this — though evidence is mixed even here.
2. You have access to genuinely skilled managers
A small number of managers have demonstrated multi-decade outperformance. Identifying them in advance (rather than in hindsight) is the difficult part.
3. Alternative strategies (infrastructure, private credit, unlisted property)
These asset classes don’t have passive index alternatives in NZ. Active management is effectively the only option for exposure to unlisted assets.
4. Factor-based investing (smart beta)
Funds that tilt toward value, momentum, quality, or small-cap factors. These are sometimes called “passive active” — rules-based, but not pure market-cap index funds. Evidence is mixed but more positive than traditional active management.
Passive vs Active: Cost Comparison in NZ
| Fund type | Example | Fee | 10-year cost on $100k |
|---|---|---|---|
| Pure passive (index) | InvestNow Foundation Series | 0.20% | ~$3,000 |
| Passive ETF | Kernel Global 100 | 0.25% | ~$3,700 |
| Passive ETF | Smartshares Total World | 0.20% | ~$3,000 |
| Active (NZ) | Milford Active Growth | ~1.10% | ~$15,500 |
| Active (NZ) | Fisher Funds Growth | ~1.15% | ~$16,200 |
10-year cost estimates assume 8% gross return, compounding effect of fees on portfolio value.
A Practical Approach for NZ Investors
For most NZ investors without specialist knowledge or access to institutional research:
- Core (80–90%): Low-cost passive index fund — InvestNow Foundation Series, Kernel High Growth, or Simplicity Growth
- Satellite (10–20%, optional): Active fund or thematic bet — Milford if you want an NZ active component, or a sector/region tilt
- KiwiSaver: For most, a passive or low-cost option (Simplicity, SuperLife, Kernel KiwiSaver) beats the default active provider by a significant margin over 30 years
The 80/20 core-satellite approach lets you participate in any active outperformance without betting the entire portfolio on it.
Frequently Asked Questions
Isn’t the market efficient? Why does anyone use active managers? Active managers don’t accept market efficiency theory and believe their analysis can identify mispricings. In some markets (especially smaller, less-followed ones) there is evidence of genuine inefficiency. In large, well-followed markets like the US, evidence for consistent active outperformance is very weak.
What about KiwiSaver? Are active KiwiSaver funds worth it? The same logic applies. A growth-oriented KiwiSaver fund from Simplicity (0.31% p.a.) will likely beat a similar fund from a higher-fee active manager (0.8%–1.5%) over your 30–35 year working life, even if the active fund generates modestly higher gross returns. See KiwiSaver vs ETF NZ.
Should I just copy Warren Buffett’s Berkshire Hathaway? Berkshire Hathaway has outperformed the S&P 500 over several decades — but underperformed in the most recent decade as its size makes outperformance harder. It’s a concentrated position in a single US company, not accessible in NZ PIE fund form, and subject to FIF tax. It’s not a recommended approach for NZ investors.