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Hedge Clippings | 02 April 2026 Active vs Passive: why averages can send you in the wrong direction The latest S&P report says most active managers underperformed their benchmark over the past 12 months. Fair enough. That is the headline. But as ever in funds management, the headline is only half the story. Because averages can be deceptive. It is a bit like the old line about having your head in the oven and your feet in the freezer - on average, you are fine. In practice, not so much. The same applies to active management. Saying that the "average" manager underperformed may be statistically correct, but it tells investors very little about the spread of outcomes, or whether strong active managers were still well worth backing. Take Australian Small and Mid Cap funds. Over the past 12 months, only 22% beat the S&P/ASX Small Ordinaries Index return of 22.75%. That sounds like a damning result for active management. But those funds that did outperform returned an average of 32%, and three delivered more than 50%. Suddenly the story looks less like "active failed" and more like "picking the right manager mattered a lot". Stretch the horizon to seven years and the picture changes again. More than 67% of Australian small-cap funds outperformed the index, which returned just 8.73% per annum. The average return of the outperformers was 13.04% per annum, while the top five averaged 20% per annum. That is not a rounding error. That is a meaningful gap. Australian Large Cap funds tell a different story. Over the last 12 months, 40% outperformed the S&P/ASX 200 Total Return Index, which returned 7.37%. Those outperforming funds averaged 15.27%, beating the index by almost 8%. But over seven years, only 32% stayed ahead, with outperformers averaging 12.16% per annum versus the index's 10.13%. Then there are Equity Alternative funds - long/short and market neutral strategies - which flipped the script again. Over the past year, 62% of global funds and 53% of Australian funds outperformed their respective indices, with outperformers averaging 29% and 27%. Over seven years, however, those figures dropped sharply, with only 25% of global funds and 35% of Australian funds outperforming, and the margin of outperformance narrowing to 3% and 5%. So what is the takeaway? First, averages make neat headlines, but messy realities. They flatten out the differences that actually matter. Second, outcomes depend heavily on where you look. Small caps, large caps and alternatives do not behave the same way. Nor do Australia and global markets. Third, market conditions matter. In strong markets, weak markets and sideways markets, the proportion of active managers outperforming can shift materially. The real lesson is not that active always wins, or that passive always does. It is that broad-brush conclusions can miss the point. Investors do not own the average fund. They own a specific fund, run by a specific manager, with a specific process. That is why manager selection remains critical. The data may show that many active funds underperform, but it also shows that the better managers can add real value - and sometimes a lot of it. The trick is knowing how to separate them from the pack. That is where detailed performance analysis matters. Or, for those who prefer a shortcut, a disciplined framework such as AFM's Star Rankings across multiple timeframes can help identify the managers that have delivered consistently, rather than occasionally. Because in funds management, averages may make the news. But selection drives outcomes. News | Insights Waymo has 70 Humans Running 3000 Vehicles | Insync Fund Managers Software risk or renaissance? | Magellan Investment Partners February 2026 Performance News |
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