Article written by Jason Choy, InvestNow Senior Portfolio Manager – August 2026

As an investor, one of the big decisions you’ll make is whether your money is managed actively or passively.

Maybe that decision is one you’re making yourself. Maybe it’s being made on your behalf through a fund you’ve invested in without giving much thought to the underlying approach.

Either way, it’s important to understand the difference between the two.

Over the past decade, passive investing has exploded in popularity. Low costs, simplicity and strong performance have attracted billions of dollars globally, making index funds one of the most widely used investment tools in the world.

As a result, active investing has increasingly found itself under the microscope.

Can active managers justify their fees? Why do some outperform while others fall behind? And does active management still have a role to play in today’s investing environment?

For many investors, the answer is yes, but understanding why requires stepping back and looking at what active investing actually is.

What does an active manager actually do?

For many people, active investing is what traditionally comes to mind when they think about investing.

The idea of analysts researching companies, meeting management teams, studying financial statements and deciding which companies to buy or sell – all with the goal to outperform the broader market – that’s active investing.

An active manager might decide that a particular company is undervalued and deserves a larger allocation. They might avoid a company they believe is too expensive or too risky. They can hold more cash, change the balance between sectors or regions, or adjust the portfolio when their view of the market changes.

Portfolio construction and risk management are important parts of an active manager’s job. Active management doesn’t necessarily mean taking as much risk as possible. Even if a manager has strong conviction in a particular company, they’ll consider how it fits with everything else in a portfolio.

The defining characteristic of active management is discretion. Active managers have the ability to make bespoke investment decisions rather than simply accepting an index’s composition.

Different active managers will use that discretion in very different ways. That is why “active” is not necessarily a strategy in itself – it’s a general approach to investing that is made up of many different philosophies.

Why passive investing has become so popular

Passive investing on the other hand simply aims to track the performance of an index, or a basket of assets.

The rise of passive investing hasn’t happened by accident. For many investors, passive funds offer an attractive combination of low fees, broad diversification and simplicity. They also remove the challenge of manager selection. Rather than relying on a manager’s ability to outperform, you’re aiming to capture the return of the market itself.

More recently, passive investing has also benefited from market conditions.

Over the past 5 years, a relatively small number of very large technology and AI-related companies have generated an outsized share of global equity market returns. Because many major indices are weighted by market capitalisation, passive investors automatically received larger exposures to these companies as their share prices rose.

For active managers, this has created a challenging environment. Even being slightly underweight one or two of these companies, or avoiding them altogether, has in some cases resulted in meaningful underperformance relative to broad market benchmarks.

This helps explain why many broad-based passive funds have recently outperformed a large proportion of active managers.

However, that doesn’t necessarily mean active investing has stopped working or become less important in today’s investing landscape.

Why active investing still matters

While active and passive investing are often portrayed as competing approaches, they actually perform different – and complementary – roles within financial markets.

Every day, active investors analyse company results, assess economic developments and process new information. Their buying and selling decisions influence prices and help determine where capital is allocated.

This process is known as ‘price discovery’.

It’s one of the reasons financial markets are generally considered efficient. Index providers don’t directly determine the value of a company. Instead, company values are continuously reassessed by active investors analysing information and forming views about future prospects.

In many ways, passive investing relies on active investing continuing to exist.

Most major indices are weighted by market value, and those market values are influenced by the decisions of investors who are researching companies and deciding what they’re worth.

Taken to its logical extreme, if active investing no longer existed – or if nobody undertook company research or attempted to assess value – who would determine where capital should be allocated?

Active and passive investing are often framed as rivals. In reality, they’re complementary parts of the same financial ecosystem.

Looking beyond short-term performance

If there’s one concept investors should understand about active management, it’s that performance won’t always move in a straight line.

Active managers make active decisions. Some decisions will prove correct, some won’t, and sometimes a manager can make the right call but at the wrong time.

Markets don’t always recognise value immediately. A manager may identify risks that eventually materialise or opportunities that ultimately pay off, but it can take months or even years before those views are reflected in performance.

That makes active management difficult to assess over short periods, and investors should be particularly wary of making long-term investment decisions based on short-term events.

The Financial Markets Authority has recently raised concerns about managers promoting strong short-term performance figures in their marketing. Strong recent returns can create the impression of repeatable skill when they may simply reflect favourable market conditions or a handful of successful (or simply lucky) investment decisions.

The same principle also applies in reverse.

A recent RNZ report highlighted Milford’s Active Growth Fund following a period of relatively weak short-term performance. The fund’s positioning, including lower exposure to technology and US equities, was cited as contributing to its underperformance relative to peers, ranking last amongst KiwiSaver growth funds in the most recent quarter.

Yet that same positioning had previously benefited investors during weaker market periods, particularly during the tariff-induced volatile episode last year.

The lesson isn’t whether Milford was right or wrong in this one instance.

It’s that short-term performance can tell very different stories depending on where you start and stop the measurement period.

One investor may focus on a difficult quarter. Another may focus on a much longer track record. Both observations can be true at the same time.

Importantly, active investing should not be judged solely on whether every individual call works immediately. Sometimes a manager’s concerns about valuation, risk or market conditions prove well-founded, but only after a lengthy period during which performance may lag.

This is one reason many experienced investors focus on long-term track records rather than short-term results.

While past performance doesn’t guarantee future returns, a manager who has demonstrated the ability to navigate different market environments over many years provides a stronger indicator of the long-term strength of a manager’s investment process than someone who simply topped the performance tables over the most recent 12 months.

Longer-term, the Milford Active Growth Fund has also been one of the strongest-performing KiwiSaver growth funds over the 10-year period ending June 2026.

Both the FMA’s concerns and the Milford example highlight the same broader lesson: investors should be cautious about making long-term investment decisions based on short-term results, whether those results are exceptionally good or exceptionally bad.

Short-term performance can be a reason to investigate. It shouldn’t be the sole reason to invest or switch.

When does active management make sense?

There is no universal rule for when active management is preferable, but some markets may offer more opportunities for skilled managers to seek to add value than others.

Highly researched markets can be difficult to consistently outperform because thousands of investors are analysing the same information.

In less efficient markets, however, opportunities may be more plentiful.

Emerging markets are often cited as one example. Smaller companies can be another, as they may receive less analyst coverage than large global businesses.

Fixed income markets also provide an interesting example. Unlike listed shares, not every bond trades frequently and many securities can be difficult to access directly. This can create a larger opportunity set for active managers to seek to identify attractive investments and construct portfolios in ways that may be difficult for a purely index-based approach to replicate.

None of this guarantees outperformance.

It simply means there may be greater scope for skill and specialist research to add value.

How to evaluate an active manager

If you’re considering an active fund, performance is only one piece of the puzzle.

Equally important questions include:

• Does the investment process make sense? Can you clearly understand how investment decisions are being made?
• Is the manager applying that process consistently? A disciplined investment process is often more important than any single investment call.
• How experienced is the investment team? A strong long-term track record is often supported by experienced portfolio managers and analysts who have worked through multiple market cycles.
• How has the strategy performed across different market cycles? No manager outperforms all the time. Looking across different market environments can provide a better picture than focusing on the most recent year.
• How do independent research houses and institutional investors assess the strategy? Ratings from research houses and due diligence conducted by institutional investors can provide another perspective beyond headline returns.

Active, passive, or both?

One of the biggest misconceptions in investing is that you must choose one side.

In reality, many investors use both approaches. Large institutional investors often utilise passive strategies in areas they believe are highly efficient and difficult to consistently outperform, while allocating to specialist active managers in areas where they believe skill can add value.

Individual investors can take a similar approach. InvestNow gives you the “Power of And”, allowing investors to combine different managers, styles and strategies within one portfolio. Some investors use passive funds as the foundation of their portfolio while complementing them with selected active strategies. Others may prefer a predominantly active or predominantly passive approach.

There is no universally correct answer.

Your choice might also change over time. An investor may decide they don’t want to target outperformance and would rather track the market at a lower cost, while another may decide they’re happy to take on more risk for the potential for outperformance. Either can be a perfectly rational reason to change strategy.

What matters is that your selected investment approach – and any changes you make to it – continue to align with your goals, risk tolerance and investment philosophy.

Stay informed, avoid the noise

Perhaps the biggest mistake an active investor can make is treating a fund’s recent performance like a competition of backing winners.

This year’s winners can often be next year’s losers, and vice-versa. History has shown that constantly switching to the best performing fund manager over the past year is not a generally reliable path to long-term investing success

InvestNow’s investing principles prescribe understanding risk and staying informed without reacting to market noise; two things that are particularly relevant to active investing.

If you choose an active strategy, you are choosing to trust a particular investment process and manager. That doesn’t mean ignoring poor performance or never changing your mind. It means understanding why the fund has performed the way it has, whether the investment approach remains appropriate for you and whether your own circumstances have changed.

Recent performance can be a reason to investigate. It shouldn’t be the sole reason to switch.

The goal is to choose an investment approach you understand, that matches your objectives and risk tolerance, and that you can stick with through the inevitable periods when it doesn’t look like the best option on paper.

Because ultimately, active investing isn’t about being more active as an investor.

It’s about deciding how much of the investment decision making you want to delegate, understanding the trade-offs involved, and having conviction to stay the course over the long-term.

Disclaimer:

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