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
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Active management
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Passive management
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Goal
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Outperform the chosen market index
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Mirror the chosen market index
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Strategy
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Buy undervalued assets; sell overvalued
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Buy/sell assets to mirror index
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Fees
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Higher due to hands-on approach
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Lower due to automated approach
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