Is indexing gaining favor on the international front? It is with PDI Strategies, Short Hills, N.J., a unit of the Prudential Investment Corp.
Ted Lockwood, PDI's director of equity management, maintains the big inefficiencies of the developed international markets (especially the Japan component) are gone, now that Japan's weighting in the Morgan Stanley Capital International Europe Australasia Far East index has shrunk - to 41% on June 30. (According to Mr. Lockwood, it was a substantially higher 64% on March 31, 1988.)
Thus, the opportunities for active managers to outperform the index - especially by keeping their Japan weightings low - has ebbed, in Mr. Lockwood's view.
He believes investors should should embrace more heavily passive international investing. Broadly, he would recommend at least 25% of institutional investors' non-U.S. equities should be indexed using EAFE. This way, they could expect higher returns than if they only used active managers.
Now that major foreign markets have become more efficient, EAFE's results ought to surpass those of the median active international manager, he holds.