KiwiSaver and volatility: Why active v passive matters more now – Generate Wealth Weekly

KiwiSaver’s passive investment trend is being tested by fresh market turmoil. Photo / 123rf

Periods of market calm can make investing feel deceptively simple. When most assets are rising and liquidity is abundant, simply “owning the market” through a passive strategy can work well. But when volatility returns – as we are seeing now amid escalating geopolitical tensions – the distinction between active and passive investing becomes far more meaningful.

For KiwiSaver investors, these moves are not just headlines – they directly affect balances. Most KiwiSaver funds are heavily invested in global sharemarkets, meaning periods like this can translate into short-term declines, even when long-term fundamentals remain intact.

Recent events have been a sharp reminder that markets are not one-way streets. Conflict in the Middle East has pushed energy prices higher, increased uncertainty and shifted investor sentiment quickly. Markets have responded accordingly. The MSCI World Index has been down as much as 7% since the conflict began. However, some markets have held up better than others, including the S&P 500 in the US and New Zealand’s sharemarket, the NZX. By comparison, Europe’s STOXX 600, with the Hang Seng and Nikkei indices in Asia, have experienced roughly double the declines.

That divergence is telling – and highlights why positioning matters.

Passive investing, by design, follows the market. It allocates capital based on index weights, meaning the largest companies and most popular sectors receive the biggest share of investment, regardless of valuation or changing risks. This works well when trends are stable and leadership is narrow. But it also means investors are, in effect, driving using the rear-view mirror.

Active investing takes a different approach. Rather than simply accepting market composition, active managers assess where risks and opportunities are evolving and position portfolios accordingly. This flexibility becomes particularly valuable during periods of disruption, when leadership within markets can shift quickly.

For KiwiSaver members, this distinction is particularly important. Many funds – whether labelled conservative, balanced or growth – rely heavily on passive exposures to global markets. Others take a more active approach to asset allocation and security selection. Understanding which approach your fund takes can be crucial, particularly in periods like this when market leadership is shifting.

Recent market moves also highlight how quickly leadership can rotate – and why flexibility matters. The smaller-cap Russell 2000 index in the US has been down as much as 10% since the conflict began, with the earlier rotation towards “old economy” and small-cap stocks unwinding. Investors have shifted back toward areas offering scale, resilience and earnings certainty.

These kinds of rotations are difficult for passive strategies to navigate. By design, they remain exposed to whatever parts of the market had previously been performing, even as conditions change. Active managers, however, can respond – adjusting positioning as leadership rotates and reallocating capital towards areas showing greater resilience or stronger forward-looking fundamentals.

Heading into this latest bout of geopolitical tension, Europe had been one of the stronger-performing regions globally. Improving economic data, stabilising inflation and relatively attractive valuations had supported a rotation into European equities. However, with war risk rising closer to home and energy security once again in focus, sentiment has shifted sharply.

By contrast, the United States – despite concerns around valuations and concentration – has held up more robustly. Its relative energy independence (the US is a net exporter of oil), deep capital markets and plethora of high-quality companies have provided a degree of insulation. Nvidia is a key example of a high-quality US company. The artificial intelligence (AI) darling rose strongly following its recent developer conference, where it doubled its order forecast for next-generation chips to around US$1 trillion ($1.7t) through to 2027 – a clear signal that demand is not just holding up, but accelerating. Last week’s results from computer memory manufacturer Micron reinforced this theme, with management noting that supply remains constrained amid ongoing strength in AI-related demand.

These developments highlight an important point: while broader markets may be volatile, structural growth drivers remain firmly in place. Identifying and maintaining exposure to these trends – while managing risks elsewhere – is a core part of active portfolio positioning.

Market shocks – whether driven by war, inflation or policy shifts – tend to create dispersion. In other words, the gap between winners and losers widens. Some sectors may benefit, while others face pressure. Some regions prove more resilient, while others are more exposed.

In these environments, broad market exposure becomes a blunt instrument. Active investing, by contrast, allows for a more nuanced response – identifying not just where risks lie, but where opportunities are emerging.

United States President Donald Trump boards Air Force One. Photo / Tierney L. Cross, The New York Times

Volatility does not just create risks – it creates opportunity. Market sell-offs often see high-quality companies marked down alongside weaker ones, allowing active managers to buy into strong businesses at more attractive prices. Passive strategies, by contrast, tend to do the opposite – reducing exposure as prices fall, rather than taking advantage of dislocations.

There is also an important behavioural dimension to consider.

Volatility is often described as a test of investor discipline, but it is equally a test of investment strategy. Passive investors are, by definition, fully exposed to market swings and must effectively “go with the flow”. When markets fall, they fall with them. While this may be acceptable for long-term investors in theory, in practice it can be challenging – particularly when headlines are dominated by conflict and uncertainty.

Active strategies aim to manage this experience. Not by eliminating volatility altogether, but by seeking to mitigate downside risks and provide a smoother investment journey through diversification, selective positioning and, where appropriate, more defensive settings.

For New Zealand investors – particularly those in KiwiSaver – there is an additional layer to this discussion.

New Zealand is a small, open economy and a price-taker when it comes to energy. Geopolitical shocks such as the current one tend to flow through quickly – most visibly at the petrol pump, but also more broadly through inflation and the cost of living. At the same time, the New Zealand sharemarket is relatively concentrated and offers limited exposure to many of the world’s fastest-growing sectors.

New Zealand’s sharemarket has, notably, held up better than many global peers during the recent bout of volatility. Resilience has been supported by our market’s more defensive composition – including utilities, infrastructure and companies with relatively stable earnings profiles. Lower exposure to the more volatile parts of global equity markets has also contributed to this relative stability.

This raises an important consideration for KiwiSaver investors. It is worth understanding how much exposure you have to New Zealand versus offshore markets. In periods like this, when the local market is proving more resilient, that balance can make a meaningful difference to outcomes.

Currency also plays a role. The New Zealand dollar typically weakens during periods of global uncertainty, which can boost returns on offshore investments when translated back into New Zealand dollars. However, it also introduces additional volatility. Active managers can make deliberate decisions around currency exposure, while passive strategies typically do not.

None of this is to suggest that passive investing does not have a role. Its low-cost, diversified nature makes it a sensible option in certain circumstances. However, the idea that passive is always superior – particularly across all market conditions – is simply not accurate.

Different approaches tend to perform better at different times. Passive strategies have benefited from a long period of rising markets, abundant liquidity and narrow leadership. But as conditions become more complex – with higher inflation, geopolitical instability and shifting economic dynamics – the case for active management becomes stronger.

More importantly, not all active managers are the same. While the average may struggle to outperform after fees, there is clear evidence that the top tier can add meaningful value over time, particularly in more volatile and less efficient markets.

This reinforces a key point: active investing is not about reacting to short-term noise, but about making informed, forward-looking decisions as conditions evolve.

As the current environment reminds us, markets can shift quickly. Leadership can change. Risks can emerge where they were previously absent.

In such times, simply following the market may not be enough.

Having a deliberate approach to positioning – one that can adapt to new information and changing risks – can make a meaningful difference to long-term outcomes.

And when volatility returns, that flexibility is no longer just a “nice-to-have”.

Generate is a New Zealand-owned KiwiSaver and Managed Fund provider managing over $8 billion on behalf of more than 180,000 New Zealanders.

This article is intended for general information only and should not be considered financial advice. The views expressed are those of the author. All investments carry risk, and past performance is not indicative of future results.

To see Generate’s Financial Advice Provider Disclosure Statement or Product Disclosure Statement, go to www.generatewealth.co.nz/advertising-disclosures/. The issuer is Generate Investment Management Limited.