Outperformance for stocks
To keep things simple, let’s focus on portfolios investing in stocks.
Is it okay to claim outperformance if your return exceeds the benchmark’s by more than 1 basis point (0.01%), 25 bps, 50 bps, or 100 bps?
Or should the margin be calculated relative to the benchmark’s return? After all, exceeding the benchmark’s return by 26 basis points (0.26%) looks better when the benchmark returns 0.01% than when it returns 45%.
Please answer the poll in the right-hand column of this blog. I’ll report on the results in my February e-newsletter.
Diverse opinions on “outperform”
I’m literal-minded. To me, a fund “outperforms” when it beats its index by the tiniest margin, though I doubt that I’d crow about that. However, asset management companies often report such returns as “in line with” or “closely tracking” the benchmark. The concerns of their legal or compliance departments probably influence this decision.
Here’s one example:
…the Wasatch Heritage Fund posted a return of 6.22% for the quarter. These results closely tracked those of the Fund’s benchmark, the Russell 1000 Value Index, which returned 6.78% over the same period.
Meanwhile, some managers–including the manager of the Wasatch Global Science & Technology Fund–question whether their returns should be compared to benchmarks.
Typically, the first paragraph of our quarterly letter to shareholders includes a statement regarding the Fund’s performance relative to its benchmark. We intend to move away from this approach beginning with this letter, as
we think the industry norm of tracking performance versus a broad index on a quarter-by-quarter basis distracts from the Fund’s long-term investment strategy. Our new mantra, forged by the pressure of the 2008–2009 credit crunch, is that we must invest “away from the market” as we attempt to deliver exceptional long-term returns.
I’m looking forward to learning what YOU think.
Dec. 27. Oops. I made a miscalculation in discussing the Heritage example, so I’m deleting the offending sentence thanks to David Lufkin.