A practical guide to understanding what you actually own
Amie Baker | Rekab Advice. Prepared for Equity Mates.
Look under the hood. The structure tells you how you access an investment. The strategy tells you what is happening with your money underneath.
Active and passive investing — what’s the difference?
I don’t think investors need to belong to an active camp or a passive camp. They are simply different ways of investing, and they can do different jobs within a portfolio. Passive investing can be incredibly useful: it can be low cost, transparent and an efficient way to get broad market exposure. Active management can be useful when we want specialist expertise, flexibility, a different source of return or a manager to make decisions that an index simply is not designed to make.
At Rekab, we don’t start by deciding that a portfolio should be a certain percentage active and a certain percentage passive. We start with the asset allocation and the job each part of the portfolio needs to do. What exposure do we want? What risk are we taking? What do we need this part of the portfolio to achieve? Then we decide which investment or manager is the right tool for that job. Our portfolios are predominantly active, but if passive is the most efficient tool for an exposure, we are perfectly happy to use passive.
“Every investment in our portfolio needs a job description. If we can’t explain what its job is and why we’ve selected it, it probably shouldn’t be in the portfolio.”
An ETF does not mean passive
This is probably the first piece of jargon worth clearing up. An ETF tells me how I am accessing an investment. Active or passive tells me how the money underneath is being managed. There are passive ETFs that track an index, and there are Active ETFs where an investment manager is making decisions about what to own, what not to own and how to construct the portfolio. Active management can also sit inside a traditional managed fund, an LIC or another investment structure.
The ETF market itself has changed enormously. ASX data shows there were around 215 ETFs on the ASX in January 2021, 451 by May 2026 and 468 exchange-traded products by 31 August 2026. In the latest full financial year, 28 of the 50 new ETFs listed were active. So saying “I invest in ETFs” does not tell us enough anymore. We still need to look under the hood and understand what is actually happening with the money underneath.
Source: ASX Investment Products reporting, including August 2026.
What actually happens when I put $100 into a passive ETF?
Imagine the entire sharemarket has only three companies. Company A is worth $60 billion, Company B is worth $30 billion and Company C is worth $10 billion. If the index is a conventional market-cap-weighted index, $100 invested across that market would be roughly $60 in Company A, $30 in Company B and $10 in Company C. It is not $33.33 in each company.
| Company A | Company B | Company C | |
|---|---|---|---|
| Market value | $60bn | $30bn | $10bn |
| Share of your $100 | ~$60 | ~$30 | ~$10 |
Now imagine Company A rises from $60 billion to $80 billion while the other two companies stay the same. Company A naturally becomes a larger proportion of the market and therefore a larger proportion of the index. Nobody has sat in a room and made a conviction call that Company A deserves a bigger allocation. Importantly, the ETF does not necessarily need to buy more of Company A simply because its share price has risen; the shares it already owns have risen in value, so the weight increases mechanically.
That is one of the clever things about passive investing. You do not have to identify tomorrow’s winner in advance. As successful companies grow, they can become a larger part of the index. Companies that shrink become less significant and, depending on the index methodology, may eventually leave the index. The methodology is doing the work rather than an investment manager making discretionary decisions.
But the same mechanism can also create concentration. A conventional market-cap-weighted index does not stop and ask whether the largest company has become expensive or whether too much of the portfolio is now sitting in a handful of companies. It follows its methodology. That is not an argument that passive investing is bad. It is an argument for understanding what you actually own.
I own hundreds of companies — surely I’m diversified?
Owning 500 companies does not mean you have 1/500th of your money in each company. In a market-cap-weighted index, the largest companies can have a much greater influence on returns than company number 400 or 500. This matters particularly when markets become concentrated and a relatively small group of very large companies is carrying a significant part of the index return.
So when somebody says, “I own a broad ETF, therefore I’m diversified,” I want to look one layer deeper. Where is the money actually sitting? What companies, sectors and countries are driving the return? How much of the portfolio is dependent on the same handful of businesses continuing to carry the load? Passive can still be exactly the right tool — but broad by number of holdings is not necessarily the same thing as evenly diversified by capital or by return driver.
Owning more ETFs doesn’t necessarily mean more diversification
The same issue can appear when somebody owns several ETFs. You might own a US share ETF, a global share ETF and a technology ETF and feel as though you have three completely different investments. When you open the bonnet, the same large companies may appear across all three. The labels are different, but the underlying return drivers can overlap heavily.
Diversification isn’t just owning more investments. It’s owning investments that behave differently. The useful questions are: what do I actually own, where is the overlap, where is the concentration, and what else in the portfolio can carry part of the load if the dominant exposure stops working?
What happens when an index changes?
Indices are not frozen forever. They are periodically rebalanced or reconstituted according to their rules. Companies grow and shrink, companies enter and leave, and weights change. A passive fund then follows those index changes. Again, the important distinction is that the fund is following a predetermined methodology rather than a manager making a discretionary investment judgement about whether a company is attractive at its current price.
So what changes with active management?
With active management, we are deliberately employing somebody to make decisions. A manager can decide that a company is too expensive and not own it, even if it is a large part of an index. They can buy a company the market dislikes because they believe the valuation is attractive. In bonds, they can change duration, move between government bonds and credit or select individual securities. Some managers can take short positions or use derivatives. Others specialise in a particular part of the market and spend their careers understanding it in far greater depth than a broad index ever attempts to do.
That discretion creates opportunity, but it also creates manager risk. More tools do not automatically mean better returns. A concentrated active portfolio can be more volatile. Shorting and derivatives can amplify losses. A manager can simply be wrong. So active management should not be treated as automatically better; the question is whether those discretionary decisions and that expertise are useful for the job we need done, and whether they justify the additional cost and risk.
How can people actually access active investments?
Active management is widely accessible now. You can invest directly into an unlisted managed fund, buy an Active ETF on the ASX, buy shares in a Listed Investment Company, access investments through a platform, or already have active management inside your super fund. The access point can be different, but the key is not to confuse the structure with the investment strategy underneath.
An LIC — a Listed Investment Company — is an actual company listed on the ASX whose business is investing. It raises and holds a pool of capital and the investment manager invests that capital according to the company’s strategy. As an investor, you own shares in the company. You can generally buy and sell those shares through an ordinary brokerage account, and LICs may also be available through investment platforms and some superannuation investment menus.
One important feature of an LIC is that its market price can trade above or below its net asset value, or NAV. If the underlying assets are worth $1 per share but investors are only prepared to pay 90 cents, the LIC is trading at a discount. If they are prepared to pay $1.05, it is trading at a premium.
But that market-price-versus-NAV issue is not unique to LICs. ETFs also have a market price and an NAV, and other listed investment structures can trade away from their reported underlying value. Typical open-ended ETFs have creation and redemption mechanisms and market makers designed to help keep the trading price relatively close to NAV, although small premiums and discounts can still occur. Closed-ended structures can experience larger or more persistent gaps.
A useful real-world example is the Metrics Real Estate Multi-Strategy Fund, MRE. It is not an LIC; it is a different listed trust structure. It has traded at a market price materially below its reported NAV. That helps illustrate the distinction: the market price is what buyers and sellers are prepared to transact at today, while NAV is the calculated or estimated value of the assets underneath. Where the underlying assets include private or illiquid investments such as real estate or private credit, valuations involve assumptions and are not continuously set on an exchange. A discount does not automatically prove that the market is wrong or that NAV is wrong. It tells us there is a gap worth understanding.
We also use an LIC in our own portfolios — PM Capital Global Opportunities Fund, PGF. That gives us access to PM Capital’s active global investment strategy, but structurally we are buying shares in a listed investment company rather than units in an ETF. Again: structure — ETF, LIC, managed fund, super or platform — is not the same thing as the investment strategy underneath.
“You can access active management in lots of ways now. The access point might be different, but it’s widely available. What matters is understanding what is actually happening underneath.”
Every manager needs a job description
This is how we think about portfolio construction. If we are using active managers, we don’t want ten managers all doing the same thing. Think about a football team: I don’t want eleven goalkeepers. Different people need to carry different parts of the load.
One manager might be a natural-resources specialist. Another might be a global long/short manager. Another might be looking for mispriced bonds and credit. Another might be a concentrated value investor. The point is not to collect managers. It is to know why each one is there, what we expect them to do, what risks they bring and how they interact with everything else in the portfolio.
What does active management actually mean in bonds?
Bonds are a useful example because people often understand active share picking but do not necessarily realise how active fixed-income management can be. A passive bond ETF broadly accepts the securities and weights its index gives it. An active bond manager can make judgements about which bonds represent value, whether the market is pricing credit risk correctly, how much interest-rate duration to take, where liquidity is attractive and when to sell a security because the opportunity has changed.
I recently attended a Coolabah Capital lunch where Chris Joye explained this in a way that made the mechanics very tangible. They are not simply buying a bond, collecting the yield and waiting for maturity. The team is looking for securities they believe are mispriced or undervalued, buying them, reassessing the value as markets move and selling or rotating when that value changes or a better opportunity appears.
Coolabah describes its Active Composite Bond strategy as using proprietary quantitative valuation models across government, bank, corporate and asset-backed securities. Published material describes the team as using around 50–80 models and typically executing 50–100 trades a day, representing roughly $250–500 million of trading. The strategy’s stated objective is to outperform the Bloomberg AusBond Composite 0+ Year Index by 1–2% per annum after management fees over rolling 12-month periods. That is an objective, not a promise.
This is what I mean when I ask what we are paying for. We are paying for analysis, security selection, valuation work, duration decisions and the ability to move around the bond market rather than simply accept the index.
What Morningstar actually found about active bonds
Morningstar’s 2026 Australian Active/Passive Barometer is useful here because it does not say “Coolabah beats a passive bond ETF”, and neither should we. Morningstar examined more than 800 Australian-domiciled strategies across nine categories and compared active funds with a composite of passive peers. Passive strategies outperformed across most categories over the most recent year, but the longer-term picture differed by asset class.
For Australian bonds, Morningstar explicitly said active fixed-income managers continued to hold an advantage in the Australia bond category over longer evaluation periods. It pointed to the ability to change duration, move between government bonds and credit and select corporate credit as potential differentiators from passive alternatives. For global bonds, surviving active global bond funds recorded a 100% success rate against the passive composite over both five and ten years, although Morningstar also highlighted historically low survivorship as an important caveat.
There is also an interesting structural point in bond indices. Many traditional bond indices weight issuers by the amount of debt outstanding. That means the biggest borrowers can receive larger index weights. An active manager is not required to accept those weights and can instead make a credit and valuation judgement about whether that debt is attractive.
Source: Morningstar Australia, Active/Passive Barometer 2026, published 23 September 2026.
Why specialist expertise can matter
The natural-resources example makes the idea of specialist expertise very easy to understand. When I met the Perennial Strategic Natural Resources team, what struck me was the depth of expertise behind the investment decisions. One of the investment professionals had trained in geology before moving into finance. That is somebody who can understand the geology, the project, the commodity, the mine economics and the company — not simply read a ticker on a screen.
The team conducts bottom-up research across areas such as copper, uranium, aluminium, energy and other resources. They can look at commodity supply and demand, individual projects, management teams, capital cycles and geopolitical factors. A broad resources index gives you the companies and weights determined by its methodology. A specialist active manager is being hired to make deliberate judgements about which opportunities are attractive and which are not.
That does not mean the specialist manager will always outperform. It means we can identify what we are paying them to know and do. That is the test.
Understanding long/short investment strategies
Plato Global Alpha is another useful example because it is an ETF, but what happens underneath is highly active. The strategy is a global equity long/short strategy. It can take long positions in companies it expects to outperform and short positions in companies it expects to underperform, using a systematic and quantitative investment process. Typical exposure has been around 140–150% long and 40–50% short, leaving net market exposure around 90–100%. The strategy can use derivatives and short selling, which creates additional risks as well as additional tools.
That is completely different from simply buying a passive global share ETF and accepting the companies and weights in the index. The manager is trying to generate return from both positive and negative views. More tools do not guarantee a better outcome — short positions can lose money, derivatives add complexity and active decisions can be wrong — but it is important to understand that the investment engine is different.
As at 31 August 2026, Plato reported the Global Alpha strategy had returned approximately 18.6% over one year compared with about 9.9% for the MSCI World benchmark; approximately 30.4% per annum over three years compared with about 16.1% per annum for the benchmark; and approximately 23.4% per annum since its original September 2021 inception compared with about 11.8% per annum for the benchmark. Those numbers are historical. They do not prove that active is better or that the outperformance will continue. They are useful because they show that the manager has been doing something materially different from simply owning the benchmark.
Source: Plato Investment Management, Plato Global Alpha Fund, performance to 31 August 2026.
Making valuation judgements rather than accepting index weights
PM Capital Global Opportunities Fund, PGF, gives us another version of active global investing. Paul Moore and the team run a concentrated, valuation-driven global portfolio based on fundamental bottom-up research. They are not trying to look like the global index. They can hold very different sectors, regions and companies when they believe valuations justify it.
This links back to the concentration discussion. A conventional market-cap-weighted global index does not make a discretionary call that a company has become too expensive. If its market capitalisation grows, its index weight generally grows. An active value manager can look at the same company and decide the valuation no longer makes sense, own less of it or avoid it entirely, and put capital somewhere else.
PM Capital has described parts of the global market as a “barbell” of valuation extremes, with opportunities away from some of the market’s most expensive areas. In the 2026 financial year, PGF reported portfolio performance of approximately 32.9%, with areas including European banks, copper producers and gold companies contributing. Again, one year of performance does not prove that active management is superior. It illustrates the result of a portfolio that was positioned very differently from the benchmark.
Structurally, PGF is also our LIC example. We are accessing an active global equity manager by buying shares in a listed investment company, not by buying an ETF.
So if passive beats active so often, why would we use active?
Because the evidence is more nuanced than “passive always wins” or “active always wins”. Morningstar’s 2026 Australian research found passive outperformed active peers across most segments over the latest year. That matters. If somebody randomly selects an active fund, there is no reason to assume they will beat a passive alternative.
But the same research found that the top quartile of active managers generated positive excess returns over ten years in seven of nine categories. It also found stronger longer-term active outcomes in areas including Australian mid/small caps and fixed income. That tells us that manager selection matters — but it does not make manager selection easy. Looking backwards and identifying the top quartile is very different from knowing in advance which managers will be in that top quartile over the next decade.
That is why our due diligence is about more than last year’s return. We want to understand the people, their investment philosophy, whether the process is repeatable, how they construct the portfolio, what risks they are taking, how they have behaved through different market cycles, their fees and capacity, and most importantly what role they will play alongside the investments we already own.
Underperformance doesn’t automatically mean a manager has failed
One of the things I’m passionate about is investors understanding why they own something. A manager underperforming for six or twelve months does not automatically mean the manager has failed. We want to know why they have underperformed. Is their investment style simply not being rewarded in the current environment? Is that exactly what we would expect them to do in this part of the cycle? Has something fundamentally changed? Or have they actually stopped doing the job we hired them to do?
If you do not understand the job description, it is very easy to chase whichever fund won last year, sell the manager whose style is temporarily out of favour and repeat the cycle. Past performance matters as evidence, but it is not the investment thesis by itself.
Fees matter — but what are we actually paying for?
Low cost is a genuine advantage of passive investing. Active management generally has a higher hurdle because we are paying somebody to do something beyond tracking an index. I don’t want to dismiss that. If we are going to pay more for active management, we want to be able to identify what we are paying for.
That might be specialist resources research, quantitative long/short capability, credit analysis, security selection, valuation work, risk management or the ability to move duration. Published fund returns are generally shown after the fund’s ongoing management costs, but investors still need to understand performance fees, transaction costs, brokerage and spreads, platform costs and any other costs that may apply. The useful question is not simply “which one is cheaper?” It is “what am I paying, what am I receiving for that cost, what risk am I taking, and what is the net outcome?”
Are Active ETFs more volatile?
Not simply because they are active. Active is not a risk category. You have to open the bonnet. A defensive active bond strategy and an aggressive long/short equity strategy can both be called active and have completely different risk profiles. Volatility depends on the underlying asset class, concentration, leverage, shorting, derivatives, liquidity and the risks the manager is deliberately taking.
Passive does not automatically mean low risk either. A passive technology ETF can be extremely volatile. A broad passive equity ETF can fall sharply when equity markets fall. The label tells us how the portfolio is managed, not how risky the underlying assets are.
Diversification is about correlation as well
Diversification is not simply adding more funds. We want to know whether different investments actually behave differently and whether they are exposed to different return drivers. That is why the team analogy works so well. We do not want eleven goalkeepers. We want different parts of the portfolio capable of carrying different parts of the load.
A resources specialist, a long/short global equity manager, an active bond manager and a concentrated global value manager can all be active, but they are not doing the same job. Equally, two passive ETFs can look different by name but own many of the same companies. The label is never enough.
Core and satellite
A common way to construct a portfolio is called core and satellite. The core is often broad, low-cost passive exposure, and the satellites are active managers or specialist exposures added around it — perhaps to seek a different source of return, add specialist expertise, manage a particular risk or simply add a bit of spice. It is a perfectly valid way to construct a portfolio.
It is just not where we start at Rekab. We do not begin by saying, for example, 70% passive core and 30% active satellites. We begin with the asset allocation and the jobs that need to be done. We then select the investment or manager we believe is most appropriate for each job. That process currently leads us to a predominantly active portfolio, with passive used where we believe it is the most efficient tool.
What if I’m 30 and I already own VAS and VGS?
You may not need to add anything simply for the sake of adding active management. Broad, low-cost index exposure can be an excellent starting point and may be entirely appropriate for many investors. The useful questions are what you are trying to achieve, what you already own, whether there are gaps or unintended concentrations, how much risk you can tolerate and whether an additional investment genuinely brings something different to the portfolio.
Age alone does not decide active or passive. A 30-year-old may have a long investment horizon and be comfortable with a high allocation to growth assets, but the appropriate portfolio still depends on their objectives, financial situation, risk capacity and behaviour. The investment needs to have a reason to be there.
So where do we land on Morningstar’s research?
We use it as evidence, not ideology. The research shows that passive is extremely difficult to beat consistently in some markets, particularly highly researched large-cap markets. It also shows that active management has had a stronger long-term record in some areas, including Australian mid/small caps and fixed income. The global bond result is striking, but Morningstar’s survivorship caveat matters. The top-quartile result across seven of nine categories tells us some managers have added value historically, but it does not tell us which managers will do so in future.
So the research does not give us a reason to join a camp. It gives us a reason to be selective, understand the market we are investing in and be very clear about what we are paying a manager to do.
And where do we land overall?
Active and passive are simply different ways of investing, and they can do different jobs within a portfolio. Passive can be a brilliant way to obtain broad, transparent, low-cost market exposure. But investors still need to understand concentration, overlap and the fact that a conventional market-cap-weighted index follows a methodology rather than making discretionary valuation decisions.
Active management allows us to hire specialists. Coolabah can make active decisions across bonds and credit. Perennial can bring specialist natural-resources expertise. Plato can run a global long/short strategy. PM Capital can make concentrated valuation decisions that look very different from the index. None of that means active automatically wins. It means those managers have different job descriptions.
“We don’t start by choosing active or passive. We start with the job. What do we need this part of the portfolio to do? What exposure do we want? What risk are we taking? What does the manager actually do underneath? And if we’re paying more for active management, can we clearly identify what we’re paying them to do?”
Important information and disclaimer
This material has been prepared by Rekab Enterprises Pty Ltd trading as Rekab Advice for general information and educational purposes only. It does not take into account your individual objectives, financial situation or needs and should not be considered personal financial advice. Before acting on this information, you should consider whether it is appropriate for your circumstances and consider seeking personal financial advice.
References to particular investments, fund managers, ETFs, LICs, managed funds, indices, benchmarks or investment strategies — including examples drawn from portfolios managed by Rekab Advice — are provided solely for educational and illustrative purposes and should not be interpreted as a recommendation to buy, sell or hold any particular investment.
Performance figures, benchmark comparisons and research findings referred to in this material are historical and were current at the dates stated. Past performance is not a reliable indicator of future performance. Historical outperformance of a fund, manager or investment strategy does not imply that outperformance will continue, and historical research comparing active and passive investment strategies does not indicate how any individual investment will perform in the future.
Investments involve risk, including the potential loss of capital. Investment values and market prices can rise and fall, and the market price of a listed investment may differ from the reported value of its underlying assets. Information has been obtained from sources believed to be reliable but may change. Before making an investment decision, investors should consider the relevant Product Disclosure Statement or other disclosure documents and whether the investment is appropriate for their circumstances.
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