| How to Use Benchmarks continued... |
|
| The dominance of the S&P 500 has given rise to a whole slew of more-specialized competing indexes, allowing for more precise comparisons with the style of a given fund. These include the small-cap Russell 2000 and the extended-market Wilshire 4500, as well as style-specific indexes like the Russell 2000 Growth index. Of course, when venturing outside the domestic-equity market, the S&P 500 becomes even less relevant. In the fixed-income arena, the Lehman Brothers Aggregate index serves as a broad proxy for the bond market, but most managers prefer to use one of the many specialized indexes that conform to particular bond sectors and maturity range class="LnkA3Ln"ernational-equity funds, the MSCI EAFE index has historically been weighted heavily toward Japan, so many managers will turn to the EAFE ex-Japan index as one alternative. Morgan Stanley also offers indexes that measure performance at the regional and single-country levels. |
|
| Peer Groups as Benchmarks |
| A different method for finding appropriate benchmarks is to use peer-group measures--that is, to see how your fund stacks up against those that practice a similar investment style. This is sort of like comparing your physical strength to a group of people with similar characteristics--other 35-year-old women, or other ex-high-school football players. Peer-group measurements are in some ways more authentic than indexes because they average the performance of other actively managed funds, rather than the theoretical performance of an index. Among the most common types of peer-group benchmarks are prospectus objectives, Lipper fund groups, and Morningstar fund categories. |
|
| Each has its own drawbacks, though. Prospectus objectives can be terribly vague, and a fund may not actually invest according to the style suggested by the objective--the main reason why Morningstar went to its own system of categorization. Lipper groups share some of the definitional problems of prospectus objectives, and, moreover, they often slice up the fund universe so narrowly (especially as used in fund advertisements) as to become practically useless to the average investor. Morningstar's categories, based on the Morningstar style box, represent an improvement in that they aggregate funds according to their actual investment styles as reflected in portfolios, but their composition tends to be less stable than other peer-group indexes. |
|
|
|
> Home
> Glossary > Support |
