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By Jason Stipp and Patricia Oey | 12-08-2014 11:00 AM

Active or Index for Overseas Exposure?

Morningstar senior analyst Patty Oey offers tips to help global investors pick a vehicle for their foreign investments.

Note: This video is part of Morningstar's December 2014 Guide to Better Investment Picking special report.

Jason Stipp: I'm Jason Stipp for Morningstar. Today, we're featuring Morningstar's Guide to Better Investment Picking, and we're talking about better overseas investment picking with senior analyst Patty Oey.

Patty, thanks for joining me.

Patricia Oey: Thanks for having me.

Stipp: When investors are looking to go overseas, I think there has been conventional wisdom that active managers have been able to beat the index for varying reasons, perhaps by avoiding Japan in years past or getting exposure to emerging markets. When you look at the evidence, though, does it seem like active managers really have been able to best the index over time?

Oey: Well, the conventional wisdom kind of implies that managers are able to consistently market-time, consistently know that, "Oh, I should be in Japan or I should be in [emerging markets] or I shouldn't be. I think we've seen that, generally speaking, no one can consistently market-time well.

But I did a very rough look at our data. If you look at U.S. equities and you look at the performance of the managers who are in the top quartile over the last 10 years, their ability to outperform the S&P 500 maybe is about 100 basis points. If you look at international large equity, the alpha is actually much higher. It's between 150 and 200. So, the data does seem to suggest that international-equity fund managers' work is able to add alpha.

Interestingly, in emerging markets, which people think is the least efficient, the alpha isn't really that high, maybe it's closer also to 100 basis points. And maybe an unscientific explanation for this is that, with emerging markets, all those individual countries are very different. The companies in them are very, very different. So, for a manager and his or her team to really know these companies really well could be quite challenging relative to international large equity.

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