Active or passive? Getting the balance right

The latest S&P SPIVA Australia Scorecard, released in September, has reignited one of the longest-running debates in investing. In the first half of 2026, 78% of active Australian large-cap equity funds underperformed the S&P/ASX 200. That puts 2026 on track for the second-highest underperformance rate since the scorecard began in 2013. Over ten years, 88% of Australian equity funds and 94% of global equity funds failed to beat their benchmark.  

This is notable because conditions looked favourable for active managers. Dispersion, the spread of returns across individual stocks, rose sharply. Across developed markets it reached levels last seen during the Global Financial Crisis. Locally, sector returns ranged from double-digit gains in Materials and Energy to a 21.9% fall in Health Care. Yet market leadership was narrow. Only 35% of ASX 200 companies beat the index, and the weight of the top 20 stocks rose to 63.4%. 

Several forces are at play. A few large companies (notably technology) have driven recent returns, and many active managers have held them below index weight. Quantitative trading has grown materially, closing mispricing quickly, while structural issues such as increases in passive flows and the introduction of the super performance test steer more capital towards index weights. Fees are the other key factor. Over ten years, the average active Australian share fund trailed the index by about 1.2 percentage points a year after fees. Add back a typical fee and that gap largely closes. 

However, it is important to note that these trends can change. Concentration has peaked before. The Nifty Fifty in the 1970s, Japan in the late 1980s and technology stocks in 2000 each reached around 40% of their benchmark before falling away. The largest AI-linked companies sit at similar levels today. Locally, News Corp made up 15% of the All Ordinaries in early 2000, and five years later had left the local index altogether. At home, the major banks dominate just as rates have risen and house prices fall. An AI slowdown, an inflation shock or other unforeseen issues could all shift leadership. 

Does this mean a return to active stock picking is imminent? High dispersion suggests the opportunity is there, but the long-run record suggests caution is warranted. With this in mind, we generally combine three investment approaches when building portfolios: passive, systematic and active. Passive funds track an index at low cost and suit the most efficient markets. Systematic funds follow set rules to favour certain traits and can adjust as market conditions shift, while keeping costs and tracking error low. Active managers make their own calls, and we use them where markets are less efficient or specialist expertise is needed. 

Over the long term, we aim to add value through the markets we focus on, how we position as conditions change, and the managers we select. We won’t (and don’t) get every call right, but we want each of these areas to contribute through time. That, not a fixed view on active or passive, is what getting the balance right means to us.