That’s a marked difference in performance and such variations can have a significant impact on performance if held in a portfolio. If investing with a passive manager, investors will have exposure to the poor-performing stocks as well as the strong-performing stocks. This is where the value of an active manager can really come to the fore. By virtue of the fact that they seek to outperform the Index, they are not forced to hold all of the stocks in the Index (this of course also has the trade-off of a higher tracking error). This can be particularly beneficial during a down market, as active fund managers can make a call not to hold poor-performing stocks, whereas passive managers are required to own all of the stocks. The value of bottom-up research really comes into play and highlights how important it is to pick the right manager. Tyndall is a strong believer in active management for both Australian equities and fixed income funds.

We believe there are inefficiencies in the market which can be exploited by those that can pick quality stocks that represent good value. Within the fixed interest area, credit investments highlight the need for active management. With credit’s asymmetric return profile, active management reduces tail risk by excluding those parts of the benchmark most likely to underperform severely – avoiding one default or serious downgrade of a benchmark component can give rise to substantial outperformance. More generally, an active selective choice of a diversified portfolio of credits can optimise returns while reducing risk. One point that both active and passive managers can generally agree on is that there is a place for both in the investment management industry – passive managers can’t function well without the analysis carried out by active managers, while active managers rely on beta to provide mispricing opportunities.

While the individual investor might have a philosophical belief about active or passive, ultimately it comes down to selecting the right manager. A proven and disciplined investment process, consistent performance, a well-resourced and stable investment team and a strong business framework are key factors investors need to focus on – rather than relying on surveys that paint a particular picture about one style versus the other at one point in time. Indeed our own research on the performance of both our Australian equities and fixed interest capabilities proves the point. Certainly we haven’t outperformed every year and no manager has, but on average, over the long term on an after-fees basis, we have. Brett Himbury is the managing director of Tyndall/Suncorp Investment Management