Benchmarks and Performance Evaluation

Links | Background
See also Mutual Funds, Consultants and Money Managers, and Historical Data

You can't manage what you can't measure.
William Hewlett

Links

• S&P Indices Info and Scorecard
• Wilshire Index Info
• Morgan Stanley MSCI Performance
• Frank Russell Company Index Info, US Indexes, and Index Construction
• BARRA Index Info
• Dow Jones Indexes
• NASDAQ Indices (Other Indices)
• JP Morgan Government Bond Index
• Lehman Brothers Indices

• Morningstar Fourth Quarter Mutual Fund Category Returns (3Q00 - 2Q00 - 4Q99)
• Wall Street Journal 4Q Mutual Funds Performance Yardsticks (3Q) and Year-end review
• Callan Associates 4Q Review

• The Vanguard Group
  • Measuring Mutual Fund Performance
  • Using Benchmarks
  • The Major Market Indexes
  • Test Your Knowledge on Measuring Mutual Fund Performance
  • TIC-TAC-TOE: Style Analysis and Mutual Fund Performance by John C. Bogle.
  • Bogle on Indexing includes a section titled Remember that the Standard & Poor's 500 is not "The Market" and includes the percent of equity funds outperformed annually by both the S&P 500 and the Wilshire 5000.
• AIMR Performance Presentation Standards and Global Investment Performance Standards
• Measuring Sticks by Peter Bernstein in Worth (9/97)
• Index Funds Online

Trivia: According to Barr Rosenberg, how many years of observations would it take to show conclusively that even 200 basis points of incremental annual return resulted from superior investment management skill rather than chance? Answer

Background

Benchmarks are used to determine relative performance of portfolios and securities. They are particularly useful in evaluating mutual funds and money managers. Morningstar and Lipper Analytical Services are two of the many services that track and analyze mutual fund performance. Most investment Consultants also evaluate money managers and funds vis-a-vis benchmarks and other money managers and funds. Some mutual funds' fees are now tied to the funds performance relative to a benchmark. For example, Fidelity Magellan's annual management fee is determined in part by the funds relative performance versus the S&P 500.

The commonly used benchmarks for measuring stock returns are the S&P 500 for stocks in general and big caps, the Wilshire 5000 and the Russell 3000 for the US market in general, the Russell 2000 for small stocks, and the Morgan Stanley EAFE for International Portfolios.

Generally, experts recommend using benchmarks that are unambiguous, investable (using a median is not an investable option), measurable, specified in advance, and are appropriate and consistent with the managers style. Still, investors should be aware that performance evaluation has two basic problems.

1. Many observations are needed for significant results.
2. Shifting parameters during active management complicate performance valuation.

In addition to returns, its often helpful to analyze risk measures. The following are commonly used risk adjusted performance measures.

• The Sharpe Ratio (developed by William F. Sharpe) divides average portfolio excess return by the standard deviation of returns for the period. It measures reward to total volatility.
• Treynor's measure uses systematic risk (Beta) instead of total risk.
• Jensen's measure is the alpha or the total return less the return predicted by the Capital Asset Pricing Model (CAPM).

Trivia Answer: 70 years
Source: Investment Policy: How to Win the Loser's Game by Charles D. Ellis

See also Do Past Winners Repeat? and
Cherry-Picking: Survivorship Bias, Creation Bias and Other Performance Issues.

Please send suggestions and comments to Investor Home

Last update 2/7/2001. Copyright © 2001 Investor Home. All rights reserved. Disclaimer