Passive v active investment - what's the best approach?

While passive investment promotes a long-term ‘buy and hold’ strategy, active investment seeks to outperform the market through in-depth research and timely decision making. Find out more about the pros and cons of each strategy, throughout different market conditions.

2 minute read

When you invest in a fund, your money is pooled with other investors and generally spread across different types of assets, such as shares and bonds. This broad range of investments helps to diversify your portfolio which can reduce risk and provide more stable returns over time.

It’s important to know that the way these assets are selected and managed within the fund can greatly differ, based on whether the fund is passively managed, actively managed, or provides a blended approach.

• Passive investment is a ‘buy and hold’ strategy providing investors with exposure to a broad market at a relatively low cost. One of the reasons this approach is low cost is that passive investment avoids the need to perform in-depth research in an attempt to beat the market. Instead, the goal is typically to track an index, for example the FTSE All world index*. 
• Active investment means the shares, bonds, and other securities are specifically selected by the investment manager, with the goal of outperforming the market or benchmark. This approach can be beneficial in certain market environments, for example during volatile periods where strategic decision making may help to mitigate investment losses. However, a key challenge with active investing is outperforming the benchmark year after year, over the long term.  
• A blended approach uses a combination of both passive and active management. For example, an investment provider could allocate part of the portfolio to passive investment (tracking an index), and part of the portfolio could be allocated towards active investment, aiming to outperform the market by selecting the right assets at the right time. 

Advantages of a blended approach

Spreading risk: A blended approach helps to provide diversification, by including a wide range of investments, balancing passive strategies with the potential for outperformance offered by active strategies.

Cost efficiency: Passive investments often come with lower fees than active investments. By including them within the overall portfolio this helps to control overall investment costs.

Potential outperformance: Active investment allows for the possibility to outperform the market or benchmark, a chance not afforded by passive investing alone.

Investment flexibility: The blended approach offers more flexibility to adapt to changing market conditions. The actively managed part of the portfolio can identify and take advantage of undervalued assets, complementing the broader market exposure of passive investing. Undervalued assets are those shares, bonds, and other securities that can be purchased at a lower price, on the basis that their price will increase over time, as their true value is recognised by the market.

What’s the best approach?

There’s no ‘one size fits all’ to investing, everyone has a different risk appetite, different goals, and different investment time horizons. Both passive and active investment strategies have their place, but a blended approach can provide the resiliency needed to give investors great outcomes.

At a high level, a blended approach is ‘actively managed’, because of the active decisions required to allocate funds in a way that optimises long-term returns. For example, making decisions such as how to allocate the passively and actively managed portions, and decisions around currency hedging – a financial strategy used to protect against fluctuations in foreign exchange rates.

Our BNZ KiwiSaver Scheme funds and YouWealth funds are actively managed, but we include substantial investments in passively managed underlying funds, so we can capture the best of both worlds.

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*The FTSE All World Index is a market capitalisation weighted index representing the performance of the large and mid-cap equities from the FTSE Global Equity Index Series. It covers 90-95% of the investable market capitalisation and both developed and emerging markets.

BNZ Investment Services Limited, a wholly owned subsidiary of Harbour Asset Management Limited, is the Issuer and Manager of the BNZ KiwiSaver Scheme and YouWealth. Download a copy of the Product Disclosure Statements:

• BNZ KiwiSaver Scheme Product Disclosure Statement (PDF 1.1MB)
• YouWealth Product Disclosure Statement (PDF 1.4MB)

Investments in the BNZ KiwiSaver Scheme and YouWealth are not bank deposits or other liabilities of Bank of New Zealand (BNZ) or any other member of the National Australia Bank Limited group. They are subject to investment risk, including possible delays in repayment. You could get back less than the total contributed. No person (including the New Zealand Government) guarantees (either fully or in part) the performance or returns of the BNZ KiwiSaver Scheme or YouWealth, or the repayment of amounts contributed. National Australia Bank Limited, the ultimate owner of BNZ, is not a registered bank in New Zealand but a licensed bank in Australia and is not authorised to offer the products and services mentioned on this webpage to customers in New Zealand.

BNZ Investment Services Limited (BNZISL) uses the BNZ brand under licence from Bank of New Zealand, whose ultimate parent company is National Australia Bank Limited. No member of the FirstCape group (including BNZISL) is a member of the NAB group of companies (NAB Group). No member of the NAB Group (including Bank of New Zealand) guarantees, or supports, the performance of any member of FirstCape group’s obligations to any party.

This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. Neither BNZ nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any information, representation, or omission, whether negligent or otherwise, contained in this publication.