Active vs Passive Investing – Where Managed Funds Fit
In 2026, Australian investors face a pivotal choice between active and passive strategies. But investing involves more than picking an approach—it also means understanding how different investment vehicles work and how to build a portfolio that aligns with your financial goals.
This article compares active and passive investing, then explains how managed funds fit between direct shares and exchange traded funds. We’ll cover common vehicles in Australia: listed ETFs tracking major market indices like the S&P/ASX 200, unlisted managed funds, index funds mirroring benchmarks like the MSCI World, and separately managed accounts for customised exposure.
We also explore how financial advisers can help investors navigate these options to create diversified portfolios tailored to their risk tolerance and investment horizon.
Active vs Passive Investing: Key Differences at a Glance
How you invest matters as much as what you invest in. The key differences between passive and active investing strategies—including the concept of active management—shape fees, returns, and the effort required to manage your own portfolio.
Passive investing means tracking a particular market index like the S&P/ASX 200 or MSCI World to closely match market returns at low cost.
Active investing means fund managers or investors making research-based decisions to outperform a particular benchmark and earn alpha.
Here are the core contrasts:
Aim: Passive strategies seek to match index returns; active strategies attempt to beat them
Fees: Passive funds typically charge lower fees (0.10–0.40%) because they do not require payment for a fund manager’s expertise; active funds carry higher fees (0.80–1.50%+) and typically charge a base fee and a performance fee to incentivize the fund manager.
Decision-making: Passive uses rules-based rebalancing; active investing requires ongoing research and hands-on management, leveraging the fund manager’s expertise and discretion.
Monitoring: Passive investors need minimal oversight; active investments require regular performance reviews
Passive investing is based on a long-term buy-and-hold approach, often through mutual funds or ETFs, and is appealing to long-term investors who prefer lower costs and steadier returns.
Many investors choose to invest in a combination of passive and active investing strategies to achieve diversification in their portfolios.
Both styles can be implemented via managed funds or ETFs in Australia. Managed funds themselves can be either actively managed or index-tracking.
What Is Passive Investing?
Passive investing is a buy-and-hold investment strategy that seeks broad market exposure over long periods—typically 10 years or more. The approach aims to have a fund replicate returns of a relevant market index rather than beat it.
Index funds are constructed by holding securities in the same proportions as their benchmark. A passive index fund tracking the S&P/ASX 300 holds Australian shares weighted identically to that index. The goal is keeping tracking error—the deviation from the benchmark—under 0.5% annually.
The most popular passive investments in Australia include:
Australian shares index managed funds (e.g., Vanguard’s Australian Shares Index Fund tracking S&P/ASX 300 with ~0.16% MER)
Global shares ETFs tracking MSCI World ex-Australia
Bond index funds mirroring the Bloomberg Global Aggregate Bond Index
These popular passive investments can be accessed via exchange traded funds listed on the ASX or unlisted index managed funds through platforms like Netwealth or Hub24.
Key benefits:
Lower fees averaging below 0.20% for core indices
Transparency of holdings and rebalancing rules
Tax efficiency from low turnover (5–20% annually)
Minimal maintenance for passive investors
Main limitations:
Cannot outperform the index before fees
Must hold underperforming stocks if they remain in the index
Full exposure to market downturns—the 2020 COVID drop saw the ASX 200 fall 37%
The first passive index fund concept revolutionised investing by proving that matching the market often beats trying to beat it.
What Is Active Investing?
Active investing centres on fund manager choosing specific securities and timing decisions to outperform a benchmark index or achieve an absolute return target. An active investor or manager might aim for CPI + 4% over rolling five-year periods.
The typical process involves:
Macroeconomic forecasting and company research
Quantitative screens for value or momentum factors
Portfolio construction with position limits
Regular trading with turnover rates of 50–100% annually
Risk controls including derivatives for hedging
Australian examples include an actively managed Australian equity fund targeting S&P/ASX 200 + 2% after fees through concentrated holdings, or multi-asset funds using active strategies to navigate different asset classes based on economic growth outlooks. Even an actively managed gold fund or technology investments portfolio would follow similar research-driven approaches, where a sector comprises technology investments weighted by conviction rather than index rules.
Potential advantages:
Flexibility to increase cash during volatile periods or market volatility spikes
Ability to avoid sectors with weak fundamentals
Capacity to pick investments targeting specific themes (small caps, ESG, infrastructure)
Main drawbacks:
Higher fees eroding returns over time versus passive funds
Greater dispersion between strong and weak active managers
Many actively managed funds perform below their benchmarks over 5–10 years
Where Managed Funds Fit In
Managed funds in Australia is an umbrella term covering a broad range of professionally managed pooled vehicles—both actively managed funds and index-tracking stock funds offered by fund managers.
Different structures include:
Unlisted managed funds (unit trusts via platforms)
Listed managed funds and actively managed ETFs quoted on the ASX
Traditional index managed funds from large managers like BlackRock or Vanguard
Managed funds can implement:
Pure passive strategies: Index managed funds mirroring the S&P/ASX 300
Pure active strategies: Stock-picking or sector-tilted approaches including actively managed mutual funds
Smart beta approaches: Rules-based factor investing sitting between classic active and passive, similar to passive mutual funds but with tilts
Investor use cases:
Retail investors wanting professional management and daily pricing
Advisers constructing portfolios using mixed active and passive investments on platforms
Institutions requiring specialist mandates unavailable in standard ETFs
Costs, Performance and Risk
Fees, expected returns, and risk profiles differ significantly between active and passive strategies and across managed fund structures.
Fee patterns:
Passive index funds and ETFs: 0.10–0.40% MER for core indices
Active equity funds: 0.80–1.50% MER, plus potential 15–20% performance fees
Specialist alternatives (private debt): Often exceeding 2%
A cost benefit analysis reveals that a 0.5% fee gap compounds to 10–15% terminal wealth difference over 30 years.
Performance evidence: SPIVA Australia Year-End 2024 data shows 82% of large-cap active funds underperformed the S&P/ASX 200 over 10 years. However, small-cap and credit categories show more mixed results, with 40–50% of managers adding value. Past performance in these niches suggests persistent skill exists for some.
Risk differences:
Passive funds mirror benchmark beta (~1.0) with volatility matching the market
Active funds vary based on mandate—concentrated portfolios may amplify or reduce risk depending on market conditions
Combining Active and Passive: Core–Satellite Portfolios
The core and satellite approach is a common strategy investors and advisers use, with Rainmaker data showing 60% portfolio adoption among Australian advisers.
Core allocation (60–80%):
Low-cost passive asset exposure to major market indices
Provides diversification and anchors overall portfolio risk
Often implemented via index managed funds on platforms
Satellite allocation (20–40%):
More specialised investments like active small caps or infrastructure
Seeks additional return or manages downside during volatile periods
Uses fund manager expertise for specific market views
A typical blended investment portfolio might allocate funds as follows: 40% Australian shares index fund, 30% global shares ETF, 20% active Australian small caps targeting ASX Small Ordinaries + 3%, and 10% infrastructure. This approach to combining active with passive lets investors apportion funds strategically while allocating money efficiently across how different asset classes behave over time versus passive funds alone.
Practical Considerations for Australian Investors and Advisers
Choosing between active and passive is not only about returns. Governance, transparency, and Australia’s regulatory environment also matter. Many investors underestimate the importance of fee certainty and liquidity when building long-term portfolios.
For investors:
Clarify investment goals and time horizon (3, 7, 15+ years)
Understand risk tolerance and whether investing aims for growth or income
Decide between set-and-forget index funds or active approach requiring ongoing review
Check fee structures and performance across full market cycles
Consider tax efficiency and liquidity—unlisted funds may have 30-day notice periods
For financial advisers:
Assist clients in aligning investment choices with their goals and risk profiles
Design diversified portfolios blending active and passive funds
Keep abreast of product features, fees, and performance trends
Provide ongoing portfolio reviews and adjustments based on market conditions and client needs
Investment decisions should be made with a licensed financial adviser to ensure alignment with personal circumstances and objectives.
How MoneyPath Can Help
MoneyPath specialises in guiding Australian investors through the complex landscape of active and passive investing, including where managed funds fit within your portfolio. Our expert advisers work closely with you to understand your financial goals, risk tolerance, and investment horizon. We help design tailored investment strategies that blend active and passive funds effectively, leveraging a core-satellite approach to optimise diversification and manage risk. Whether you are considering index funds, actively managed mutual funds, or a combination of both, MoneyPath provides transparent advice, ongoing portfolio reviews, and support to help you make informed decisions and stay on track towards your financial objectives. With MoneyPath, you gain access to professional expertise to navigate market conditions, fee structures, and investment vehicles, ensuring your portfolio aligns with your unique needs and adapts as your circumstances evolve.
FAQs: Active vs Passive Investing and Managed Funds
Are managed funds active or passive? Managed funds are a structure, not a strategy. The fund inside can be actively managed or index-tracking. Check the Product Disclosure Statement for the objective and benchmark—an S&P/ASX 200 benchmark suggests passive, while “benchmark + 2%” suggests active.
Is passive investing always cheaper in Australia? Broad-market index funds on large indices typically charge the lowest fees. However, niche index or smart-beta products can approach 0.50–0.70%, rivalling lower-fee actively managed funds.
Do active funds really beat passive funds over time? Evidence shows only 15–20% of active funds consistently outperform after fees over 10 years. However, certain categories like small caps and fixed income show higher success rates where skill persists.
How do ETFs differ from unlisted managed funds? ETFs trade on the ASX with intra-day pricing; unlisted mutual funds use end-of-day unit pricing via platforms. Both can implement active or passive strategies—actively managed ETFs now comprise over a third of ASX listings.
Do fees vary significantly between active and passive funds? Yes, active funds generally charge higher management fees, often between 0.8% and 1.5%, plus performance fees, while passive funds typically have lower fees around 0.1% to 0.4%.
Can I combine active and passive investing? Absolutely. Many investors use a core-satellite approach, combining low-cost passive funds as the core with active funds as satellites to seek additional returns or manage risk.
How can a financial adviser help? Advisers can tailor investment strategies to your goals, risk tolerance, and time horizon, helping you decide the right mix of active and passive investments and adjusting portfolios over time.
