Kalkine: Active vs Passive Debate: Why the ASX 200 Needs Both Perspectives

Highlights

• The active versus passive discussion continues to evolve in equity markets including the ASX 200

• Active managers play a crucial role in price discovery and market efficiency

• Passive ETFs gain popularity through simplicity, but rely heavily on prices set by active strategies

The debate around active and passive investment strategies remains a prominent theme in equity markets such as the ASX 200. The growing popularity of exchange-traded funds (ETFs), combined with the influence of large marketing efforts, has contributed to the perception that passive investing is now the dominant approach. Yet, discussions continue around the relevance and role of active strategies, especially when markets become less efficient or more volatile.

ASX-listed funds like Betashares Australia 200 ETF (ASX:A200), Vanguard Australian Shares Index ETF (ASX:VAS), and iShares Core S&P/ASX 200 ETF (ASX:IOZ) represent passive vehicles that mirror broad indices. These funds perform in line with overall index movement and reflect the work done by active managers in the market.

Understanding Price Discovery in Equity Markets

ETFs operate as price takers, depending entirely on the price movements driven by active market participants. Active managers, including those managing small cap and global equity funds, engage in extensive due diligence that includes financial modelling, site visits, and executive meetings. This process helps establish market valuations, influencing the trading levels of both individual stocks and index-tracking funds.

For instance, when a fund like Magellan Global Fund (ASX:MGF) adjusts its portfolio after research, it can influence stock pricing across the broader market. These changes are then mirrored in the prices of ETFs that hold similar stocks, such as SPDR S&P/ASX 200 Fund (ASX:STW).

ETFs and the Role of Large Issuers

ETFs benefit from the marketing efforts of large asset managers who dominate public discourse with simplified narratives about index investing. With lower operating costs and fewer overheads, these funds appeal to a broader base, especially those newer to market participation. However, their structure depends on the real-time pricing work carried out by active managers.

This dynamic has led some commentators to describe passive funds as beneficiaries of the heavy lifting done by active teams. While these funds provide cost-effective exposure, they rely on accurate and timely pricing for their portfolios to remain aligned with market reality.

Market Inefficiencies and the Need for Active Focus

There are areas of the market where inefficiencies persist, and active strategies are more prominent. Sectors such as small caps and fixed income tend to display wider variances in pricing, due to less analyst coverage and lower liquidity. This creates a scenario where active management may improve pricing accuracy in ways passive structures cannot replicate.

For instance, funds with exposure to regional and emerging companies often require direct engagement to evaluate business prospects. Vehicles like WAM Capital (ASX:WAM) or Pengana Capital Group (ASX:PCG) use such hands-on strategies to align their portfolios with perceived market inefficiencies.

Different Approaches for Different Timelines

Portfolio construction often accounts for personal timelines, income generation, and volatility management. For those seeking less volatile outcomes, allocations may prioritise sectors or assets with steadier historical performance. This might lead to blending active and passive strategies, depending on the level of price variability across sectors.

Companies offering listed multi-asset funds, such as Diversified United Investment (ASX:DUI), often apply this logic by balancing domestic and international exposure through both active stock selection and passive ETF holdings. This mix reflects the need for a range of tools in achieving consistent outcomes through changing market conditions.

Engagement and Curiosity in Markets

Beyond structural performance, there is a broader cultural and intellectual appeal in analysing company trends, understanding innovation, and studying the factors that move global economies. Some market participants follow the stories of figures behind listed companies or engage with themes like artificial intelligence or decarbonisation to better grasp long-term shifts.

From a structural standpoint, the ASX 200 will likely continue to see a blend of approaches, with ETFs providing access and active funds driving deeper company-specific insights. This dual structure ensures that both efficiency and engagement have a role within the modern equity landscape.