Mutual Fund Talk

International Stock Fund Managers Fail To Beat Index

This does not bother me. My interpretation is there are simply too many incapable fund managers in every segment that fail to beat the index. I'm still sticking to my pick of Dodge and Cox International Stock (DODFX).

Conventional wisdom holds that active management provides an edge in less-efficient overseas markets, but recent data -- and a comparison of some top funds versus their index rivals -- shows that wisdom doesn't always prove correct.

A survey from Standard & Poor's in July, comparing the two sides for the first time, found that international index funds outperform most active funds. Over five years, the Citigroup/S&P PMI (Primary Market Index) World ex-U.S. benchmark outpaced 62.5% of international funds and the S&P/Citigroup EMI (Extended Market Index) World ex-U.S. outperformed 63.3% of international small-company funds, the survey said.

"Even in a supposedly extremely inefficient segment of the market, such as emerging markets, 88% of managers did not beat the index over the five-year horizon," S&P Index strategist Srikant Dash said.

The problem for investors is that there currently aren't a lot of choices when it comes to international index funds. Vanguard, DFA, Gartmore, State Farm, Barclays and Northern Trust are among those who provide international index funds today. But Dash said there is a growing demand for those index funds, which could become as popular as domestic index funds.

Those who believe they can select a good manager and that the good manager can find good stocks will prefer actively managed funds, he said.

"But research and hard evidence suggests it's tough to find a hard-performing manager because two-thirds of them or more don't beat their benchmarks. People don't want to settle for the average," he said.

However, he cautions that investors who have a time horizon of less than three to five years may find index funds aren't as good a bet because their benefits tend to grow over time.