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Investing Specialists

Best of Breed Domestic-Equity Funds

The active/passive debate doesn't have to be an either/or choice.

While index funds have been steadily gaining ground and now make up more than half of equity-fund assets, the active/passive debate doesn't have to be an either/or choice. Active investing works better in some areas of the market than others, so it's worth considering if you're willing to put in some extra time and research on the areas where it has the greatest potential.

As part of the recent methodology upgrades to the Morningstar Analyst Rating, we took a deep dive to see where active management has the greatest potential payoff or penalty across investment styles. The details are complicated, but the upshot is that in some areas nearly all active funds had similar results (as measured by pre-fee alpha, a measure of value added versus an index), but other areas had a wider range of outcomes. When returns tend to be tightly clustered, there's less of a potential payoff for active management. When there's a wider dispersion of returns, there's a greater potential reward--or penalty--for straying from a market benchmark.