By Greg Smith, Investment Specialist Generate KiwiSaver

Around 80% of active fund managers fail to beat their benchmark.

It's one of the most quoted numbers in investing, and it's usually wheeled out (most often by the passive side) as though it ends the conversation.

It doesn't.

The number often comes from SPIVA (S&P Indices Versus Active), a scorecard S&P Dow Jones Indices has produced since 2002. It compares actively managed funds against market indices across countries and time periods and has become one of the most widely cited pieces of evidence in the active versus passive debate.

That statistic tells us active management is hard and that investors need to be selective about who they back. It does not necessarily tell us that investment skill does not exist, nor that passive investing is automatically the best approach in every market and asset class. Flip the number around and a meaningful group of managers outperform. The more useful question is not whether active management can work, but under what circumstances, and how investors can identify those managers most likely to succeed.

The problem with the usual comparison

SPIVA's approach, like much of the research in this debate, compares active funds against market indices rather than investable products. Benchmarks serve an important purpose, but they are theoretical constructs. Investors cannot invest directly in an index, and gaining market exposure in practice involves costs, implementation decisions and structural differences.

That distinction matters because a benchmark and a real-world investment option are not necessarily the same thing. A comparison against a theoretical index may answer one question, but it is not always the same question investors are actually trying to solve.

The scorecard's own limitations

That's not the only consideration. The design choices behind performance scorecards are generally reasonable, but they can influence the headline result.

Take survivorship bias. Funds that close or merge are typically treated as underperformers to avoid the common mistake of measuring only the surviving winners. This is an important correction, although some funds may close for reasons unrelated to investment performance.

Weighting also matters. Most scorecards count funds equally regardless of size. A niche strategy managing a few million dollars can have the same influence on the result as a manager overseeing billions on behalf of investors.

Benchmark selection introduces another challenge. A broad index often needs to represent an entire investment category, yet not every fund in that category is seeking to replicate or outperform that specific benchmark. Differences in hedging, sector exposures, sustainability screens or geographic allocations can all create a mismatch between a fund's intended strategy and the benchmark against which it is assessed.

Categories themselves can blur important distinctions. Sector-specific, thematic and style-focused funds are often grouped alongside broad diversified managers and measured against a common benchmark, despite having very different objectives.

A recent New Zealand example illustrates the point. Earlier this year, SPIVA reported that roughly 90% of New Zealand-domiciled active global equity funds underperformed its chosen benchmark over the previous three years. However, separate analysis found that many New Zealand-domiciled passive global equity funds also lagged the same benchmark over a similar period.

One explanation is that many local funds, whether active or passive, are not actually designed around that specific index. Different index constructions, ESG exclusions and hedging approaches can all create performance differences relative to a benchmark that was never intended to be the primary reference point.

Where that occurs, the question may be less about why investment strategies underperformed and more about whether the benchmark fully reflects the investment approach being measured.

None of this invalidates the conclusion that active management is difficult. It simply suggests that the often-cited 80% figure reflects the outcome of a particular methodology rather than an unchanging law of investing.

A fairer test: real funds against real funds

Morningstar's Mid-Year 2026 Active/Passive Barometer takes a different approach. Rather than comparing active managers with theoretical benchmarks, it compares active funds against an asset-weighted composite of real, investable passive funds within the same category, with fees reflected on both sides.

Across more than 9,000 US funds and approximately US$29 trillion in assets, just over 40% of active funds outperformed their passive peers over the year to June 2026.

Results varied meaningfully by category. In US large-cap equities, one of the most heavily researched and competitive segments of the market, the success rate was only 27%. In other categories, active managers fared considerably better.

The findings highlight an important point: active versus passive is not a single contest with a single outcome. The relative merits of each approach often depend on the market being analysed.

Consistency matters more than a snapshot

A fund near the top of a quarterly ranking may simply have benefited from one good decision, a favourable market environment or a currency move. Equally, a capable manager can experience periods of underperformance.

Longer time horizons generally provide a more meaningful assessment of investment skill.

Sport provides a useful analogy. One podium finish may reflect a great performance on the day. Consistently finishing near the front of the field over many years suggests something more enduring.

Investing is no different. The managers worth paying attention to are rarely those who top a single league table. They are the ones that continue producing competitive outcomes across different market conditions.

Morningstar makes a similar point in its work on rolling returns. A manager can look exceptional when measured from one specific starting point and one specific end point. A more demanding test examines how results look when that measuring window is repeatedly moved through time.

This is where rolling 10-year returns can be particularly useful. Rather than relying on a single observation, they provide multiple overlapping tests and can help distinguish repeatable skill from favourable timing.

Looking at long-term performance within New Zealand, a number of active managers have demonstrated a high degree of consistency relative to peers over extended periods. While past performance is never a guarantee of future results, such persistence suggests skill may remain an important contributor to outcomes in certain areas of the market.

For KiwiSaver investors, that may be more relevant than any philosophical debate. Retirement outcomes will ultimately depend on long-term performance, risk management and consistency over decades rather than quarters.

Active and passive play different roles

One of the long-standing arguments in favour of active management is that active investors contribute to price discovery.

Indices do not assess whether a company is cheap or expensive. They follow predetermined rules. In a market-capitalisation-weighted index, companies that become larger represent a bigger share of the portfolio regardless of valuation.

Active investors, by contrast, continually evaluate businesses, challenge market assumptions and decide whether prices accurately reflect underlying fundamentals. Their collective activity helps establish the prices at which all investors ultimately transact.

In that sense, active and passive investing are not necessarily competing systems. They can be viewed as complementary parts of the same market ecosystem. Passive investing provides efficient and low-cost market access, while active investors contribute analysis, research and price formation.

Passive isn't necessarily neutral

Another common misconception is that passive investing represents the absence of an investment view.

In practice, many passive strategies embed meaningful exposures through their construction. Market-capitalisation-weighted indices automatically allocate more capital to the largest companies, meaning investors become increasingly concentrated in those firms as their market value rises.

Today's major global indices illustrate this clearly. A relatively small number of large technology companies account for an unusually high proportion of overall index weight. Investors buying those indices are not avoiding concentration risk. They are accepting it through the index's design.

The same principle applies to thematic indices, sector ETFs, country-specific funds and many factor-based strategies. These products involve investment choices too, although those choices are embedded in rules rather than managerial discretion.

The distinction is therefore not that passive strategies take no positions while active managers do. Rather, active positions are made intentionally and can be adjusted over time, while passive exposures are determined by the rules governing the index.

Risk without reward

Taking more active risk does not automatically lead to better outcomes.

Research from Schroders examining global large-cap managers found that moderate excess returns were achievable for some managers over long periods. However, managers taking very large deviations from their benchmark were not consistently rewarded for doing so. Fewer than half outperformed over time.

The implication is that active management alone is not enough. The quality of implementation matters. Disciplined approaches have historically shown a better ability to translate active risk into improved risk-adjusted returns.

It doesn't have to be either-or

Passive funds offer a simple, diversified and cost-effective way to access markets. Active management, meanwhile, provides the potential for differentiated outcomes in areas where skill, information advantages or market inefficiencies continue to exist.

The evidence suggests neither approach is universally superior.

For investors, the more useful exercise may be understanding where active management has historically added value, where passive exposure may be sufficient, and how each approach aligns with their objectives, risk tolerance and time horizon.

The active versus passive debate is unlikely to be settled by any single statistic. Ultimately, investment success depends less on choosing sides and more on selecting the right approach for the task at hand.

This article is intended for general information only and should not be considered financial advice. All investments carry risk, and past performance is not indicative of future results.