The difference in plain terms
A passive fund buys the whole market. It picks an index — the S&P/NZX 50 for New Zealand shares, say, or the S&P World Index for global ones — and holds everything in it, in the same proportions as the index itself. Nobody is deciding that one company looks cheap this quarter. If a company is in the index, the fund owns it. If the index changes, the fund follows.
An active fund tries to beat the market. A manager and their team research companies, hold more of the ones they believe will do well, avoid the ones they don't, and adjust as conditions change. The goal is to end up ahead of the index rather than matching it.
Put simply: a passive fund accepts the market return and keeps costs down. An active fund pays for the attempt to do better.
Why the fees differ
The gap in fees is not a pricing decision so much as a reflection of what each approach costs to run.
An active fund has people to pay
Analysts, portfolio managers, economists and traders all sit behind an actively managed fund. Someone has to research companies, visit them, model their earnings and decide what to buy. That salary bill is real, it recurs every year, and it is charged to the fund whether or not the decisions turn out well.
An active fund trades far more
Acting on a view means buying and selling. Every trade carries brokerage and the spread between buying and selling prices. A fund that turns over much of its portfolio each year pays those costs repeatedly. An index fund trades mainly when the index itself changes, or when money comes in and out.
A passive fund follows a rule
Once the index is chosen, the fund is largely mechanical. No research team, minimal trading, and the same process whether the fund holds $50 million or $5 billion — so the cost can be spread very thin.
In New Zealand this typically shows up as an annual fund charge of roughly 0.2% to 0.5% for a low-cost index fund, against roughly 0.9% to 1.5% for an actively managed one. The exact figures vary by provider and fund type, and your fund's charge is published in its quarterly fund update.
The whole debate comes down to one question: does the extra you pay for active management reliably buy you extra return?
The bit nobody mentions: "passive" funds still make active decisions
A fund can track an index perfectly and still have had a great many judgement calls made on your behalf:
- Which index? Global developed markets, or global including emerging? That's a real bet.
- How much in shares at all? The split between growth and income assets is an active choice, and it's the biggest driver of your outcome — see fund types explained.
- Currency hedging. How much of the overseas exposure is hedged back to NZ dollars moves returns significantly, and it's a decision someone made.
- Exclusions. Most "passive" KiwiSaver funds screen out weapons, tobacco and so on. That's a departure from the index, by choice.
So "passive vs active" isn't really a binary. It's a question of where you're paying for judgement, and whether that judgement is worth what it costs.
What about diversified funds like yours?
Most of the research you will see compares a single-asset fund — global shares, say — against the index it is meant to track. Your KiwiSaver fund is not that. A growth or balanced fund is diversified across shares, bonds and cash, in New Zealand and overseas, and that makes the question harder to answer than it first appears.
There is no single benchmark to test it against
Comparing a passive diversified fund with an active one is not really a test of stock picking. Most of the gap between any two diversified funds comes from how much each holds in growth assets and how much of the overseas exposure is hedged back to New Zealand dollars. Those are asset allocation decisions, and as covered above, the passive fund made them too.
What the research does show
Internationally, Morningstar's Active/Passive Barometer covers allocation funds as well as single-asset ones. Its most consistent finding is about cost rather than style: over the ten years to June 2025, funds in the cheapest quintile succeeded roughly twice as often as those in the most expensive. Success rates also varied a great deal by category, which is why blanket statements tend to fall over.
In New Zealand the picture cuts both ways. FMA data indicates that most active KiwiSaver funds have underperformed their passive benchmarks after fees over five and ten year periods. At the same time, the quarterly Melville Jessup Weaver survey — the standard reference for KiwiSaver fund performance here — regularly has actively managed funds among the top-ranked diversified funds over ten years, and Morningstar has noted a mix of active and passive funds performing strongly against their peers.
Why the ranking tables mislead
Those surveys group funds into categories such as growth or balanced, but the funds inside a category are not identical. One growth fund might hold 85% in growth assets and another 75%. In a rising market the first will finish above the second almost regardless of how it is managed. A good deal of what looks like manager skill in a performance table is really a different risk setting — and funds that closed along the way are no longer in the table at all.
Where that leaves it
The fee argument still holds, because it is arithmetic rather than opinion: a fund charging 0.9% more has to out-earn that gap every single year just to draw level. But for diversified funds specifically, the evidence is less clear-cut than it is for global share funds, and it would be overstating things to say the debate is closed.
The genuinely hard part is unchanged. Some active managers do beat their peers over long periods. Identifying which ones will do it in future, rather than which ones did it in the past, is the part nobody has solved.
How to tell what you're actually in
- Find your fund's quarterly fund update or Product Disclosure Statement — every KiwiSaver fund publishes both, and Smart Investor (smartinvestor.sorted.org.nz) has them all.
- Look at the total annual fund charge, as a percentage. That's the number that compounds against you.
- Read how the fund describes its approach. Words like "index", "passive" or "tracks" point one way; "our investment team selects" points the other.
- Check whether the fee is buying you something you actually want. A higher fee for a genuinely differentiated responsible-investment mandate is a decision you can make on purpose. A higher fee for closet index-tracking is not.
Reviewed 14 July 2026. General information only — not personalised financial advice. Rules and data change; figures shown are illustrations, not forecasts.