Active or Passive Investing: What Are You Paying For?

Choosing an index is itself consequential. A concentrated equity index, a broad global index and a multi-asset strategy can all be implemented systematically while doing different jobs. An inexpensive fund tracking the wrong exposure does not become appropriate because its fee is low.

In this article

First choose the comparison

An active South African equity fund and a global equity tracker are not clean substitutes merely because both own shares. Their currencies, countries, holdings and opportunities differ. Comparing their recent returns can answer which market did better, while saying little about the value of the manager's decisions.

The same problem appears when a flexible income fund is compared with cash, or an equity-only tracker with a balanced retirement portfolio. Constraints, cash holdings, bond duration and credit risk can explain part of the difference before skill or cost enters the discussion.

Use a named mandate as the starting point. What may the fund own? What must it hold? What may it avoid? Which benchmark measures that task, and is the published comparison in rands with distributions reinvested? If one fund can go substantially offshore and the other cannot, that distinction belongs above the performance table.

An exchange-traded fund is a trading structure, not proof of a passive strategy. Active ETFs exist. Index exposure can also be available through a unit trust. Satrix's explanation of ETFs and unit trusts is useful for the South African access distinction: the route's costs matter as well as the underlying fund charge.

What the latest South African evidence says

The SPIVA South Africa Mid-Year 2026 summary, published 3 September 2026, reports that 66% of active South African equity funds underperformed the S&P South Africa 50 in the first half of 2026; 69% underperformed the broader Composite Capped index. The result changed with the benchmark, but a majority lagged both.

Bond results caution against turning that into a universal slogan. Over five years, 16% of short-term bond funds underperformed the STeFI Composite on absolute returns, compared with 75% on the report's risk-adjusted comparison. A better return and a better return for the volatility experienced are different findings.

The report's methodology includes funds that merged or closed, compares category benchmarks, and uses fund returns after expenses but before loads and entry fees. Index returns do not deduct fund investment expenses. The statistic is a historical category result, not the probability that a particular manager will fail next year, and not a comparison with every investable tracker after its costs.

That evidence raises the burden of proof for paying more for active decisions. It does not identify in advance which manager will outperform, nor does it show that a low-cost index will meet a household's spending commitments. Those are different questions.

The extra fee creates an explicit hurdle

Suppose two invented implementations provide comparable exposure. One charges 0.25% annually and the other 1.20%, with all charges in this simplified comparison deducted from the year-end value. There are no other costs, taxes, contributions or withdrawals. These are illustrative rates, not actual quotations or market averages.

If both portfolios have zero gross return on R1 million during the year, the lower-fee implementation ends with R997,500 and the higher-fee one with R988,000. The difference is R9,500. That result follows from the fees and the assumed unchanged pre-fee capital; it predicts neither portfolio's return.

To finish at R997,500, the higher-fee portfolio would need a gross return of approximately 0.9615% in this example:

Required gross return = (1 − lower fee) ÷ (1 − higher fee) − 1.

The familiar 0.95 percentage-point fee difference is a useful approximation. The exact hurdle differs because the fee is charged on the end value, including any return. Real funds usually accrue costs through the year, so their exact arithmetic can differ from this deliberately simple convention.

These are conditional break-even calculations, not projected benefits or returns. They show the work an additional fee has to overcome under the specified convention. They do not show whether a manager can overcome it, whether the exposures are genuinely comparable, or whether a different risk profile is valuable to the investor.

The fee-hurdle example above records the equation and the matching net values. No future wealth path is assumed.

A low tracking error does not mean no cost

Two terms often become muddled. Tracking difference is the fund's return minus the index return over a period. Tracking error measures the variability of those differences through time. Vanguard's index-tracking explanation distinguishes them and identifies costs, sampling and other implementation effects.

Imagine a tracker that lags its index by exactly 0.30 percentage points in each of three measured periods. Its differences have no variability in this invented series, so its tracking error for those observations is zero. The investor still received less than the index in each period. Low tracking error describes consistency, not free implementation.

Conversely, a small positive difference in one year does not establish superior tracking skill. Tax treatment, securities lending, index changes and timing can affect the comparison. The source of the difference matters. International provider mechanics help explain the terms; they are not evidence that a South African reader will obtain a particular result.

For an actual fund, compare the same share class, period, currency and return convention. A price index excluding dividends cannot be fairly compared with a fund total return including them. A fund return after its internal expenses can still exclude the investor's platform or advice fee. The investor return-gap article explains the further effect of personal cash flows.

What can justify active decisions?

The strongest case is a defined job with a credible process that can be evaluated. A mandate might allow a manager to avoid particular risks, analyse securities outside a narrow benchmark, or vary exposures within agreed limits. Whether that is useful depends on the objective and what the investor pays for it.

The proposal needs to explain why the process has a plausible advantage, how it differs from available rules-based exposure, and what evidence would count against it. “We select quality companies” is not enough if the holdings largely mirror a much cheaper alternative. Nor is a good recent ranking evidence that the process will keep working.

There is a reasonable counterargument to judging solely on benchmark return: a portfolio designed to limit a particular risk may lag in a market that rewards taking that risk. That does not excuse every shortfall. The risk objective needs to have been stated beforehand and the evidence must show whether it was achieved. Changing the explanation after every result makes the mandate impossible to assess.

A household can also combine active and index implementations. The relevant question then becomes whether each adds a distinct function after costs. Two funds owning much the same shares may create duplicate fees and paperwork rather than meaningful diversification. A fixed 50/50 blend is not an answer to that question.

What can go wrong with a passive choice?

An index can concentrate money in a few large companies or sectors. It can exclude parts of the opportunity set, rebalance in a way the investor does not expect, or expose rand spending to currency movements. “Passive” describes implementation discipline, not the absence of investment risk.

The index rulebook deserves the same attention an active mandate receives. A market-capitalisation index, an equal-weight index and a factor index can produce materially different holdings. A rule based on value or momentum is still a particular investment exposure; it is not the entire market made neutral.

Access also matters. Brokerage and bid-offer spreads can affect an ETF purchase or sale. Platform charges can change the comparison with a unit trust. For South African retirement money, the available product and regulatory constraints must be assessed separately from whether a component uses an index. A cheap discretionary equity fund is not automatically a substitute for a compliant retirement arrangement.

A comparison record worth keeping

Before deciding between proposals, record the answers on one page:

1. Job: the exposure or risk objective, with its role in the wider portfolio.
2. Mandate: what each fund can own, its limits and its actual benchmark.
3. Cost: the available share class, internal expenses, platform, advice and trading costs, with overlap removed.
4. Evidence: the result over relevant periods, its risk, and the explanation for differences.
5. Review condition: what change in mandate, people, implementation, costs or household need would warrant reassessment.

ClearGauge's judgement is that an additional fee needs an explicit justification, while an index choice needs an explicit exposure justification. Those tests are compatible. They help distinguish a defensible decision from loyalty to either label.

This article explains comparison methods. It has not assessed your objectives, existing holdings, tax position or capacity for loss and does not recommend a fund, a switch or an active/passive split. If the immediate concern is that your own return looks wrong, begin by reconciling the cash flows and charges rather than attributing the difference to the manager's label.

Sources and assumptions

Reviewed 6 September 2026. The current SPIVA summary covers periods ending 30 June 2026; its methodology and limitations are identified above. No S&P chart or data table is reproduced. Satrix supplies local access-structure context; Vanguard supplies the definition of tracking measures, not a South African return forecast. Original calculations use invented fees and conditional returns, with tax and other costs excluded explicitly. The tracking-difference example is a synthetic three-observation demonstration, not a fund performance record.