Stock Pickers in International Markets

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Many investors agree that the U.S. financial markets are highly efficient. But are other markets outside the United States efficient? Are there profitable investments that can be made that might outperform their respective index? Many investors believe that these "underdeveloped" markets are inferior to our own, and that analysts are better at choosing stocks in international markets that outperform the appropriate index. Evidence shows that this is not the case.

One repeated study that has consistently shown that the indexes of these smaller markets, on average, have performed better than the active funds within those markets is the Standard and Poors Index vs. Active Scorecard, SPIVA(R). If one investment manager has an idea about an international country or company, it would only be logical to have numerous other firms investigating the profitable possibilities, with only one conclusion available—that none of the firms will outperform the index average over any lengthy period of time.

The higher costs associated with international investing create a headwind that makes it even harder for active investors to beat their benchmarks. In a research paper by Garret Quigley and Rex Sinquefield titled, "Performance of UK Equity Unit Trusts," the authors concluded that UK money managers were unable to outperform markets in any meaningful sense.

Some managers may post outperformance over an extended period of time, but it is quite rare that luck can be ruled out as the explanation.