How do active and passive investing compare?
Active investing relies on human fund managers who buy and sell specific shares in an attempt to beat the market, charging higher fees for their research and expertise.
Passive investing uses automated rules to simply copy an entire market index. Because it requires no human research, the fees are significantly lower, but the fund will never outperform the market it tracks.
Active management: trying to beat the market
An actively managed unit trust employs teams of financial analysts. They research companies, read financial statements, and try to predict economic trends. Their goal is to identify and buy shares that are priced too low, and sell shares before they drop in value.
Because this approach requires highly paid professionals and frequent trading, the management fees are higher. The investor pays for the manager's attempt to deliver a return that is higher than the general stock market average.
Passive management: following the rules
Passive investing ignores predictions. Instead of trying to pick winning companies, a passive vehicle — like an Exchange Traded Fund (ETF) — simply buys a tiny piece of every company in a specific index, like the JSE Top 40 or the S&P 500.
If a company makes up 5% of the total size of the index, the ETF puts exactly 5% of its money into that company. Because a computer program can execute these rules without needing human analysts, the fees are extremely low. The fund does not try to beat the market; it mathematically tracks the market return, minus the small administrative fee.
The mathematical hurdle of fees
Fees compound over time exactly like investment growth does. This creates a high mathematical hurdle for active managers.
If the general stock market grows by 10% in a year, a passive fund charging a 0.2% total expense ratio (TER) will return 9.8% to the investor. If an active fund charges a 1.5% TER, the manager must achieve an 11.3% gross return just to match the passive fund's payout. The active manager must consistently take higher risks to beat the market by more than their fee gap.
The SPIVA scorecard reality
Standard & Poor's publishes a regular report called the SPIVA scorecard, which measures how active managers perform against passive indices over time.
Historically, the data shows that over 10-year and 15-year periods, the vast majority of active equity fund managers worldwide fail to beat their benchmark index after fees are deducted. While an active manager might have a lucky streak and outperform the market for a year or two, the mathematical drag of their higher fees makes it statistically rare to sustain that outperformance over a lifetime of investing.
The South African concentration problem
While passive investing is mathematically dominant in massive, diversified markets like the United States, the South African stock market presents a unique challenge.
The Johannesburg Stock Exchange (JSE) is highly concentrated. A very small number of massive companies dominate the local indices. If an investor buys a passive JSE Top 40 fund, a large percentage of their money is tied to just those few companies, exposing them to severe concentration risk. Active asset managers in South Africa argue their fees are justified because they can intentionally ignore the index rules, forcing the portfolio to diversify away from those few giant companies to protect the investor during local market crashes.
Terms used on this page
- unit trust
- A pooled fund divided into units. Investors buy and sell units at one price set daily, based on the value of everything the fund holds.
- ETF (exchange-traded fund)
- A fund listed on a stock exchange and traded like a share, usually tracking an index. Its price moves throughout the trading day.
- TER (total expense ratio)
- The yearly running cost of a fund — management and operating costs — shown as a percentage of your investment on the fund’s fact sheet.
- concentration risk
- The risk created when too much of a financial life depends on one company, asset, sector or economy — so a single event can hit income and investments at the same time.
Reviewed July 2026