Is Active Management Worth the Cost for Australians in 2026?

Active management involves professional fund managers making investment decisions with the goal of outperforming a specific benchmark, such as the S&P/ASX 200. These managers analyse markets, select individual shares or bonds, and adjust portfolios based on research and forecasts. Their aim is to generate higher returns or manage risk more effectively than simply tracking the market.

In contrast, passive funds—like most exchange-traded funds (ETFs) and index funds—aim to replicate the performance of a market index. They do this by holding the same securities in the same proportions as the index, resulting in lower management costs and less frequent trading.

The past decade saw a surge in passive investing, as many low-cost index funds delivered competitive returns compared to higher-fee active funds. However, recent market conditions have prompted renewed interest in active strategies. Factors such as inflation, shifting interest rates, and global uncertainty have led to more divergent returns across sectors and asset classes.

Australian regulators have also responded to these changes. In early 2026, the Australian Securities and Investments Commission (ASIC) introduced stricter disclosure requirements for managed funds. These rules require clearer reporting on fees, performance benchmarks, and whether a fund is actively or passively managed. The aim is to help investors make more informed comparisons between fund options.

Superannuation funds have also adjusted their strategies. Some have increased allocations to actively managed investments in areas like Australian small caps and global equities, seeking more flexible management in uncertain times.

A key question for investors is whether active managers consistently outperform their benchmarks after fees. The answer is mixed and depends on the market segment and time period considered.

In large-cap Australian equities, a relatively small proportion of active funds have outperformed the S&P/ASX 200 over recent years, especially after accounting for fees. However, in less efficient markets—such as Australian small caps or certain global equities—active managers have sometimes achieved stronger results, particularly during periods of heightened volatility.

Fixed income is another area where active management has shown potential. When interest rates fluctuate sharply, skilled managers may be able to navigate these changes more effectively than passive strategies, which are tied to the composition of an index.

Despite these opportunities, higher management fees remain a significant consideration. Active Australian equity funds typically charge higher annual fees than their passive counterparts. Over time, these costs can reduce overall returns unless the manager consistently delivers outperformance.

Active management is not always the best choice, but there are situations where it may be worthwhile for Australian investors:

1. Less Efficient Markets

In markets where information is less widely available or trading volumes are lower—such as Australian small caps, emerging markets, or specialised sectors—skilled managers may be able to identify opportunities that passive funds miss.

2. Managing Downside Risk

Some active funds aim to reduce losses during market downturns by holding more cash, using hedging strategies, or shifting between sectors. This flexibility can help preserve capital during periods of heightened volatility.

3. Tailored Tax and Income Strategies

Active managers can structure portfolios to take advantage of franking credits, manage tax liabilities, or focus on generating income. This can be particularly important for retirees or investors with specific income needs.

Choosing a successful active manager is challenging. Here are some practical steps Australians can take when evaluating active funds:

• Assess long-term, after-fee performance: Focus on how the fund has performed over several years, not just recent results. Compare returns to relevant benchmarks and consider the impact of fees.
• Check for consistency: Ensure the fund sticks to its stated investment approach and does not frequently change strategies (known as style drift).
• Review manager tenure and transparency: Experienced managers with a clear, repeatable process may be more likely to deliver consistent results.
• Consider turnover and costs: High portfolio turnover can lead to increased trading costs and potential tax implications.

Recent regulatory changes have made it easier to compare funds. Enhanced tools and disclosures now help investors analyse performance, fees, and investment style more effectively.

For many Australians, a combination of active and passive strategies may offer the best of both worlds. Passive funds can form the core of a portfolio, providing broad market exposure at low cost. Selective use of active funds—particularly in less efficient or more volatile market segments—can add diversification and the potential for outperformance.

Ultimately, the decision comes down to your investment goals, risk tolerance, and willingness to research and monitor your investments. While active management is not guaranteed to outperform, it remains a viable option for those prepared to do their homework and select managers carefully.

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