Why I Don’t Invest in Active Funds or Private Credit

Added: 2026-05-31

[00:00:00]The active fund space keeps expanding despite investors clearly showing a perhaps a preference for passive products.

[00:00:08]As someone who doesn't invest in actively managed products yourself, where does this come from and and how do you see your sort of edge playing into this?

[00:00:16]>> Most people have seen the data where most active fund managers underperform their passive index over the long run.

[00:00:24]So, that is one side of it and I think people have gravitated to passive investing and probably rightfully so because of that. But, I will say that I do invest actively. So, I do have individual shares in my portfolio. I do own some broad-based index funds, but I also tend to gravitate towards, you know, dividend factor ETFs. So, I don't necessarily have a huge problem with active investing. I think where I have a problem is active funds and you mentioned my edge and when we think about edge as investors, it's what's your competitive advantage. And I don't feel like I have a competitive advantage to go out there and pick the right active funds. So, that involves evaluating the process that investors go through or the professional investors go through and especially in Australia where there's a little transparency into what they're buying and selling, I'm just not comfortable with using those strategies in my portfolio.

[00:01:25]>> Private assets are another one that have just exploded in popularity. Although we are seeing some sort of pullback, especially in the credit space, what makes these sort of private assets unattractive to you?

[00:01:37]>> Yeah, I mean, partially it's the same thing. So, if we talk about a lack of transparency in actively managed funds, it is tenfold when we start looking at private investments. And you mentioned private credit and I think I have two concerns about private credit. So, one, they have grown in terms of assets that have been invested in private credit.

[00:01:58]So, there's been significant growth and that means the managers have more money, they have more money to lend out. And because I have no insights into who they are lending money to and the credit quality of the people they're lending money to, that causes me to pause and ultimately reject that asset class. So, I just see a lots of money going in.

[00:02:20]Generally, that lowers credit standards.

[00:02:22]There's nothing I can do to evaluate those credit standards, so I just choose to stay away.

[00:02:29]>> And bonds are another one that sort of aren't in your portfolio you're not a big fan of. And how does your understanding of risk feed into this?

[00:02:35]And how should investors think about risk in their own portfolio?

[00:02:39]>> So, traditionally, the industry defines risk as volatility or how much particular assets will bounce around or your overall portfolio will bounce around. So, bonds have lower volatility.

[00:02:51]They also have lower returns over the long term. And so, when I'm thinking about putting together my portfolio, the first thing I'm trying to do is get a high enough return to achieve my goals.

[00:03:02]And then I'm thinking about the other things that I want. And really, when it comes down to it is I compare bonds and cash. So, cash has no volatility and cash has lower returns traditionally than bonds, but I'm comfortable with accepting those lower returns because of the other positive things cash does. It obviously allows me to withdraw money if I actually need it without having to sell equity investments. It has, as I said, no volatility. And ultimately, because I'm focused on the return that I'm getting from my portfolio and at this stage in my life, not how much it bounces around, I don't see any reason to include bonds.

[00:03:42]>> Many younger investors probably won't have sort of vivid recollections of the GFC, but you mentioned you felt particularly burned by banks during this time. And obviously, if we look at on domestic soil, um banks are a massive part of our financial system. Do you feel like you've missed out on this by excluding them from your portfolio, or do you do you see sort of parallels with the US?

[00:04:03]>> So, I think going back to the GFC, lots of investors got burned by banks. I was particularly burned by banks. Uh my largest position going into the GFC was Citigroup. Uh the stock dropped from somewhere around 60 to, you know, $1.50 during the GFC. So, obviously, that left a bad taste in my mouth. But, you know, really, if we think about what happened with the GFC, is there were banks that said that they had high-quality loans, that they had risk management processes in place, and I really took them at their word for that. And when I started thinking about it after the GFC and after all of that, you know, investor carnage during that period of time, I started thinking about, can I go in and actually evaluate any of the things these banks are saying? Banks are very complicated. If you look at the financial statements of a bank, they're very complex. You don't know who they're lending money to. You don't know what risk management policies are in place.

[00:05:08]And so, because I couldn't figure it out, I thought this is just not something I should invest in. So, it's that old adage that don't invest in things you don't understand. And upon reflection, I don't understand banks.

[00:05:21]And I would say the same thing about Australian banks. You know, when you talk to a lot of Australian investors, and banks have done well here, when you talk to Australian investors, they talk about how strong the banks are, and they talk about how good the regulatory system is. And that's fine, but that's just not something that I want to rely on. I'd rather invest in a simpler company that I understand.

[00:05:45]>> And when you sort of compile this list of assets that you exclude from your portfolio, how do you reconcile this with the need to be like adequately diversified?

[00:05:55]>> I think diversification is something that investors are a little bit confused about. There's diversification that yes, you do want to spread your investments across different categories and of course different companies, but diversification does not mean you need to own everything. And I think a lot of investors think that. So, I'd rather be really picky and have really high standards for what comes into my portfolio. And so, that's really the approach that I've taken. I believe I'm adequately diversified in terms of that single security risk. So, I'm not too worried if I just exclude these broad categories of investments.

[00:06:34]>> Investors these days are just being bombarded with noise and signal. How do you think we can sort of filter through this and determine what's really important for our portfolio?

[00:06:44]>> Yeah, I think it's starting with you.

[00:06:46]So, obviously what are you trying to accomplish? And then think about all these pitches and think about if they make sense for you. So, we talked about a bunch of different asset classes and investments, but when I hear the pitches for example for private credit, I think about does that make any sense for me?

[00:07:04]And my answer is no. I think about do I understand this investment cuz it's always going to sound compelling. So, the marketing teams at asset managers and the portfolio managers who speak in the media, they all make really compelling cases, but I think it's really just sitting there and saying, "Okay, do I understand what they're saying?" They may use all this jargon, it may sound good, but can I sit there and explain to somebody in plain terms why this investment will work and also what the risk is in that investment.

[00:07:42]>> This video has been prepared for clients of Morningstar Australasia Proprietary Limited and or New Zealand wholesale clients of Morningstar Research Limited.

[00:07:50]Any general advice has been provided without reference to your financial objectives, situation, or needs.

[00:07:56]You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest.

[00:08:03]To obtain advice for your own situation, contact a financial advisor.