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Investing Specialists

Best of Breed International Equity Funds

The data suggest you should focus on passively managed funds for the majority of your portfolio's international exposure, but it doesn't have to be an either/or choice.

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When you’re thinking about whether to use active or passive funds for your portfolio, it’s worth considering several different factors, including how much time you have available to research, what kind of asset-class exposure you need, and whether you have the patience to put up with potential underperformance from active managers. For many investors, an all-index approach is the easiest and least time-consuming way to build a portfolio aligned with their goals and risk tolerance. It's also typically more tax-efficient for assets held in taxable accounts.

If you haven’t ruled out active funds for a portion of your portfolio, though, it’s worth taking a deeper dive into the areas where active management has the potential for outperformance, as well as areas where there it’s tough to add value versus a benchmark. A few weeks ago, I wrote about how to apply our research where active management has the greatest potential payoff or penalty for different types of domestic-equity funds. The research looked at the range of pre-fee alphas, a measure of value added versus an index, for different categories of funds. 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.

Amy C. Arnott does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.