Energy Super is moving to 333 Ann Street, Brisbane, Qld 4001 on 7 December 2021.

During December 2021, appointments with a financial adviser will still be at our old Eagle Street office. From Monday 3 January 2022, appointments with a financial adviser will be at our Ann Street office. For all our new details visit our contact us page.

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Active vs passive: what’s the difference?

Published: 01 Jul 2021

Members often ask us to explain Energy Super’s position on active and passive investment management.

With recent performance across both styles being mixed – and with our year-old Indexed Balanced investment option currently outperforming our Balanced investment option – we thought we’d explore the two styles in more detail.

What’s the difference?

Passive (or index) management is where investments mirror a market or an index without any change. As there is no active intervention in the selection of investments, it’s seen as a low-skill style of investing and therefore it typically comes at a lower cost.

On the other hand, active management involves the hands-on selection of investments that are expected to outperform markets. As this requires more skill and research, it typically costs more than passive or index management.

Of course, there are pros and cons for both. Consider these arguments, which are often debated by investment commentators.

ACTIVE

PASSIVE

Pros

Cons

Pros

Cons

You have exposure to certain key asset classes such as private equity, unlisted infrastructure, and private credit, which are not available to passive investors

Higher cost

Lower cost

Only allows access to listed investments

You only invest in the investments you choose based on what you think will outperform the market and/or provide higher levels of sustainability

Outperformance and higher returns are uncertain

The lower fees of passive management are certain

You invest in all investments regardless of whether they are cheap or expensive, or if you like the individual investments or not, which removes judgements that may lead to underperformance

You must invest in all investments regardless of your opinion or personal stance e.g. gambling, tobacco, weapons

Believing that markets are inefficient you can use your skill to outperform the market throughout its cycles

 

Passive management means you will never underperform the market/index

 

Typically outperforms when markets are down

 

Typically performs well in ‘bull’ markets

 

Energy Super’s (active) Balanced and Indexed Balanced options

Energy Super’s Balanced investment option is considered lower risk as it has greater diversification than our Indexed Balanced investment option. This means it includes investments across significantly more asset classes such as alternatives, cash, fixed interest, infrastructure, property and shares. It also has some currency hedging to help reduce the effect of currency movements on foreign currency investment within that option.

On the other hand, the Indexed Balanced investment option has fewer asset classes. It invests in cash, fixed interest and shares only. In an effort to make this investment option as low-cost as possible, it also has no currency hedging. This lower amount of diversification and greater exposure to currency movements in turn makes it more risky than the Balanced investment option.

Our Indexed Balanced option has only recently celebrated its first anniversary, so you should note that its performance history is limited. This is important because the risk of any investment strategy becomes more noticeable over longer time frames. Also, short term market movements may create outcomes that are not really reflective of the underlying risk.

Our Indexed Balanced option has recently outperformed the Balanced option mostly through having no currency hedging for its exposure to international shares, which has allowed it to benefit from the depreciation of the Australian Dollar which recently fell as low as 0.55 against the US Dollar.

Energy Super’s approach to its diversified investment options is to employ active management to add incremental returns over and above the market. However, as there is a significant focus on cost, we focus on ensuring there’s value for money for the management fees paid across all investments.

Increasingly there’s the use of lower cost, lower risk index-aware investments which have allowed the Fund to save some management fees. Some of these savings will be passed back to members and some will be used to invest in other areas such as those which provide a source of returns less tied to share markets, such as private equity and debt, infrastructure and property. These investments (also called ‘alternatives’) will also provide further diversification to smooth out our investment returns.

What do the numbers tell us?

At 30 April 2020, Energy Super’s Australian Shares option has beaten the ASX 300, 200, 100 and 50 indices over short and long term periods.

Rolling period to 31 April 2020**

Energy Super  Australian Shares^

(%)

ASX 300~

(%)

ASX 200~

(%)

ASX 100~

(%)

ASX 50~

(%)

FYTD

-10.15

-13.76

-13.78

-13.85

-14.42

1 year

-7.39

-9.06

-9.06

-8.53

-8.52

3 years

2.12

1.98

1.92

1.86

1.72

5 years

4.2

3.51

3.46

3.39

2.93

7 years

5.85

5.36

5.38

5.44

4.96

10 years

6.24

5.85

5.96

6.16

5.99

^ After fees and taxes
~ Before fees and taxes

* Investment returns are not guaranteed. Past performance is not a reliable indicator of future performance.

For our International Shares option, shares are bought globally. Energy Super hedges part of the International Shares foreign currency exposure against the Australian Dollar and therefore performance is measured against the hedged and unhedged options.

Rolling period to 31 April 2020**

Energy Super  International Shares^

(%)

MSCI World ex Australia (100% hedged to AUD)~*

(%)

MSCI World ex Australia (AUD)~*

(%)

MSCI Emerging markets~ # (AUD)

(%)

MSCI SMID (USD)~┼

FYTD

-0.77

-5.42

2.88

-12.32

-13.17

1 year

-0.34

-5.85

3.5

-14.30

-13.75

3 years

7.05

4.49

9.96

-1.84

-1.15

5 years

7.23

5.60

9.05

-2.46

0.9

7 years

11.41

9.03

14.43

-1.65

3.7

10 years

9.64

9.95

11.71

-0.97

5.17

^ After fees and taxes, includes hedging
~ Before fees and taxes

* Investment returns are not guaranteed. Past performance is not a reliable indicator of future performance.

While in the short term there are variations in performance, over the long term active management has continued to provide value to members of the Fund. That’s why we offer you both an indexed option as well as access to actively managed options.

As always in managing these options, we continually review market conditions and look for diversified investment opportunities we think members would benefit from, all while ensuring we maintain our fees at a competitive rate.

Help with your investment decisions

If you’re not comfortable with your choice of investment options or your level of risk, or if you’re close to retirement, it might be a good idea to speak with one of our financial advisers provided through ESI Financial Services** . They can speak to you about the appropriateness of your investment strategy and may help you select the investments that best meet your needs. Depending on your needs, this may be at no cost to you. To arrange an appointment, contact us.

This article was prepared in May 2020 by Electricity Supply Industry Superannuation (Qld) Ltd (ABN 30 069 634 439) (AFSL 336567), the Trustee and Issuer of Energy Super (ABN 33 761 363 685), and may contain general financial advice which does not take into account your personal objectives, situations or needs. Before making a decision about Energy Super consider your financial requirements and read the Product Disclosure Statement, available at www.energysuper.com.au or by calling 1300 436 374.

*The MSCI World ex Australia Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excluding Australia). With 1,571 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The Developed Markets countries include: Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US.

# The MSCI Emerging Markets Index consists of 26 developing economies including Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.

┼ The MSCI USA SMID Cap Index captures mid and small cap representations across the US equity market. With 2,079 constituents, the index covers approximately 28% of the free float-adjusted market capitalization in the US.

**ESI Financial Services Pty Ltd (ABN 93 101 428 782) (AFSL 224952) is a wholly owned entity of LGIAsuper (ABN 23 053 121 564) (RSE R1000160).  LGIAsuper Trustee (ABN 94 085 088 484) (AFSL 230511) as trustee for LGIAsuper.