Peer Groups as Benchmarks

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Peer Groups as Benchmarks

One type of performance benchmark you can use is peer groups, or funds that buy the same types of securities as your fund. Compare funds that buy large, undervalued companies with others with the same style so-called large-value funds. Or compare those that buy only Latin America stocks with other funds that only buy Latin America stocks. That way, you’re comparing apples to apples.

Morningstar’s categories

Morningstar Categories are suitable peer-group benchmarks for most mutual funds. Depending on what a fund owns, it can land in one of more than 100 Morningstar categories. If a fund’s portfolio features large-company stocks with high earnings growth, the fund is categorized as a large-growth fund. If the fund brims with smaller companies that are inexpensive, it lands in the small-cap value category. If U.S. government bonds with comparatively short maturities populate the portfolio, the fund qualifies as a short-term government-bond fund.

What’s so great about peer-group comparisons? They give you another way to examine a fund’s performance. For example, Fund ABC’s returns lagged the S&P 500 recently. Against that benchmark, the fund looked like a dog. But against its peers, the fund looked pretty good when it lost less than its rivals. Of course, losing less than other funds is cold comfort for investors, but the fact that this fund trailed the S&P 500 isn’t so much a reflection on the fund as it is on the relatively weak performance of large-growth stocks. After all, the S&P follows more than growth stocks; it has a hefty dose of value stocks, too.