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Active and Passive Asset Management

Page last updated: 5 Feb 2020

In finance, the terms “active management” and “passive management” refer to the different ways fund managers invest their clients’ funds. For more details on managed funds, see our Managed Funds page.

Most fund managers measure how their funds are performing by comparing them with a market index. Examples of market indexes include the NZX 50 and Dow Jones Industrial Average.

Whether they try to beat their chosen market index or just match it is what makes them “active” or “passive”.

Active

Active managers aim to outperform their chosen index, typically by buying assets they deem undervalued or selling those they believe are overvalued, or by favouring certain assets or sectors over others in response to market conditions or expectations. 

They base their decisions on research, forecasting and expertise, all of which can be costly. There are no guarantees they will perform better than their chosen index.

Passive

Passive managers simply aim to mirror or “track” their chosen index, making decisions to buy or sell based on how the entire market looks at any one time. For example, if the market has 1% of a certain asset, a passive fund will hold 1% too.

Known as “index-tracking”, it’s easier with new technology and less expensive than active management, meaning lower fees.

While active managers always take a hands-on index-beating approach, they can use a combination of active and passive tools to do so.

Summary

 

Active management

Passive management

Goal

Outperform the chosen market index

Mirror the chosen market index

Strategy

Buy undervalued assets; sell overvalued

Buy/sell assets to mirror index

Fees

Higher due to hands-on approach

Lower due to automated approach