We take active risk only where there is a reasonable basis for it, and keep the rest of the portfolio simple and low-cost. The evidence on active management is more mixed than headline figures suggest.
S&P Dow Jones Indices publishes a SPIVA scorecard for Australia each year, and the headline results are usually similar. The Year-End 2025 edition, released in March 2026, found that 73.6 per cent of actively managed Australian Equity General funds underperformed the S&P/ASX 200 over 2025, and 87.6 per cent underperformed over ten years.¹ In 2025 the index returned 10.3 per cent, while actively managed funds in that category returned 7.5 per cent on an asset-weighted basis.¹
The results for global equities are weaker. Over 15 years, 96.0 per cent of Global Equity General funds underperformed the S&P World, according to the same report.¹ The scorecard also reports that 52 per cent of funds across all categories were merged or liquidated over the 15-year period.¹
These figures are sometimes read as evidence against active management generally. The detail of the scorecard shows a more varied picture, with active funds underperforming less often in some categories outside large-cap Australian and global equities over some periods.
The five, ten and 15-year results for three Australian categories show this. Over those periods, 79.8, 87.6 and 86.9 per cent of Australian Equity General funds underperformed. For Australian mid- and small-cap funds the figures were 59.5, 80.0 and 59.5 per cent, and for Australian bond funds 49.3, 62.1 and 77.2 per cent.¹ The results change with the period chosen, and no category shows a consistent advantage for active managers. In some periods, however, the proportion of active funds underperforming has been noticeably lower than in large-cap equities.
Morningstar’s research reports similar findings. Summarising its latest Australian Active/Passive Barometer, Morningstar reported that “top-quartile active managers in seven of the nine categories delivered positive excess returns over the decade”, that passive strategies outperformed active peers across most segments over the past year, and that in the mid- and small-cap blend category active managers held what it described as a durable advantage across multiple market environments.² For portfolio construction, the important finding is the gap between the best managers and the average manager. Identifying in advance which managers will be in the top quartile is difficult, and their fees are paid regardless of the result.
Past performance is not indicative of future performance, and this applies to industry figures as much as to any individual fund. The data indicates where the odds have historically been more or less favourable.
How we use active management
If active management has historically underperformed most often in large, liquid markets and has had better results in some other markets, active risk should not be spread evenly across a portfolio. We concentrate active management, and the fees that come with it, where there is a reasonable basis to expect it to add value, and use low-cost exposures elsewhere.
Where we cannot identify a reasonable basis for active management to add value after fees, we prefer to hold a low-cost market exposure. Where we can identify one, we are prepared to pay for active management and we review that decision regularly. The test is applied exposure by exposure, and it is revisited, because a case for active management that held five years ago may not hold today.
This approach has risks. Concentrating active management in fewer areas means that poor decisions have a larger effect. Low-cost index exposures carry the full risk of the markets they track, including falls. An approach that avoids active management in efficient markets will also, in some years, miss periods when active managers in those markets perform well. We consider these trade-offs acceptable.
Asset allocation and cost
Asset allocation policy explains much of how a portfolio behaves over time. A widely cited 1986 study by Brinson, Hood and Beebower found that investment policy explained, on average, 93.6 per cent of the variation in each plan’s quarterly returns over time, across the 91 large US pension plans it examined between 1974 and 1983.³ Later work by Ibbotson and Kaplan found that policy explains about 90 per cent of the variability of a fund’s returns over time, but only about 40 per cent of the differences in returns between funds.⁴ Asset allocation largely determines a portfolio’s level of risk and return, and active management adds to or subtracts from that result at the margin, which is where active fees are charged.
Returns are uncertain, while most fees are set in advance. Each dollar spent on active management is a known cost weighed against an uncertain benefit. When advisers explain a portfolio to a client, it helps if each of those costs has a stated reason.
Sources
1. S&P Dow Jones Indices, SPIVA Australia Scorecard Year-End 2025, Reports 1a, 2 and 4; commentary published 16 March 2026. https://www.spglobal.com/spdji/en/documents/spiva/spiva-australia-scorecard-year-end-2025.pdf
2. Morningstar Australia, T. Fitzpatrick, “Chart of the Week: Active or Passive? The results may surprise you”, 24 September 2026, reporting Morningstar’s Australia Active/Passive Barometer. https://www.morningstar.com.au/funds/chart-week-active-or-passive-results-may-surprise-you
3. Brinson, G.P., Hood, L.R. and Beebower, G.L., “Determinants of Portfolio Performance”, Financial Analysts Journal, vol. 42, no. 4, July/August 1986, pp. 39–44. DOI 10.2469/faj.v42.n4.39.
4. Ibbotson, R.G. and Kaplan, P.D., “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?”, Financial Analysts Journal, vol. 56, no. 1, January/February 2000, pp. 26–33. https://ideas.repec.org/a/taf/ufajxx/v56y2000i1p26-33.html