Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
What is the best way to compare a fund to its peers?
Also you can use Morningstar. Just go to a basic "Quote" page like in the link below. On the top of the page, you can insert any fund's ticker in the "quote" box. Every "quote" page will give you performance info, INCLUDING a percentile ranking, which is ostensibly comparing X Fund to its PEERS. But often, it's imprecise. MACSX is a good example. It's a rare animal, not any true peers to compare too. Even over at Bloomberg, they compare MACSX to a peer-group of only 8 funds. Odd, misleading.
It's pretty hard to categorize funds into distinct groups.
Here's three I own that are often placed side by side in a "balanced" or "conservative allocation" category: OAKBX, PRWCX, DODBX. Yet, I can tell you they invest and behave in very different ways. First one uses longer bonds - some treasuries - to hedge equity exposure. Also invests heavy in energy stocks. Its the least volatile day to day. Second one invests more in convertible bonds. More likely to vary equity exposure based on market read - and good at it. More large caps than the first fund. Third is more aggressive than first two. Holds more stocks, About twice the daily volatility. Gets banged up more, but outshines during strong markets.
All three get grouped together as "peers" but really very different animals.
As others have already said, do not assume that the comparison indexes or comparison funds used by these sites is at all accurate. Many funds now have pretty broad mandates, so while M* might classify a fund as a Global Equity fund, it may not at all be a global equity fund. It might be a sector fund that concentrates on infrastructure, or alternative energy. And a fund that owns NO domestic bonds might be stuck in what M* call its World Bond category, which includes funds that might have 40% in domestic bonds. You really have to do your homework on the funds you are reserarching, and even then, it can be difficult to make a good comparison.
Examples are two funds that we use in our "Alternative Strategies" allocation. One is a long-short currency and foreign bond fund, the other is a long-short global bond fund...two very different funds when you look carefully. M* puts them in what it calls its Nontraditional Bond category, with funds that are not allowed to short positions. Logic would say they should be in a Long-Short category, but logic does not prevail when it comes to classifying a lot of funds, and M* does not have a general Long-Short category, just Long-Short Equity. Go figure.
Another fund we use is very much a multi-cap value fund, but M* crams it in its Large Blend group, not a fair comparison at all.
Then there is Fidelity Canada, clearly not a diversified international fund at all. But M* says it is a Foreign Large Growth Fund. Huh?
So take your time when looking at comparison lists. Chances are many searches will not be fair. The best thing you can do is look in the prospectus or check the fund's online web site to see what the fund's managers use as a benchmark. At least that way you can hold them accountable to what THEY say is a fair comparison.
You have to be careful comparing a fund to a benchmark that the manager sets, sometime they will use an inappropriate benchmark as well.
For example, Wintergreen Fund lists the S&P 500 as its benchmark but it has something like 60% of its assets in international stock. Its not a good benchmark for the fund.
Another thing that makes using the managers benchmark an issue is currency exposure. A lot of stock funds will invest something like 80% of their assets in US stock and then the rest in international stock. Are they a domestic stock fund? Over the last 10 years, the dollar has dropped precipitously. All things equal, a fund that had currency exposure in the form of international stock should have out preformed one that didn't. Is the fund with international stock better managed or was it lucky?
Another example is looking at Total return funds that invest a portion in Junk Bonds, they usually compare themselves to the barclay's aggregate but that comparison isn't a good one.
Sometimes stock funds hold BONDS, how can you compare these to pure stock funds?
This makes their performance looks better than it would otherwise, especially on a risk adjusted basis. You really have to look under the hood and I wouldn't assume the prospectus benchmark is a good one.
Comments
This will be a good start.
http://www.bloomberg.com/apps/data?pid=invest_mutualfunds
peace,
rono
http://quote.morningstar.com/fund/f.aspx?t=DODIX®ion=USA
Here's three I own that are often placed side by side in a "balanced" or "conservative allocation" category: OAKBX, PRWCX, DODBX. Yet, I can tell you they invest and behave in very different ways. First one uses longer bonds - some treasuries - to hedge equity exposure. Also invests heavy in energy stocks. Its the least volatile day to day. Second one invests more in convertible bonds. More likely to vary equity exposure based on market read - and good at it. More large caps than the first fund. Third is more aggressive than first two. Holds more stocks, About twice the daily volatility. Gets banged up more, but outshines during strong markets.
All three get grouped together as "peers" but really very different animals.
Examples are two funds that we use in our "Alternative Strategies" allocation. One is a long-short currency and foreign bond fund, the other is a long-short global bond fund...two very different funds when you look carefully. M* puts them in what it calls its Nontraditional Bond category, with funds that are not allowed to short positions. Logic would say they should be in a Long-Short category, but logic does not prevail when it comes to classifying a lot of funds, and M* does not have a general Long-Short category, just Long-Short Equity. Go figure.
Another fund we use is very much a multi-cap value fund, but M* crams it in its Large Blend group, not a fair comparison at all.
Then there is Fidelity Canada, clearly not a diversified international fund at all. But M* says it is a Foreign Large Growth Fund. Huh?
So take your time when looking at comparison lists. Chances are many searches will not be fair. The best thing you can do is look in the prospectus or check the fund's online web site to see what the fund's managers use as a benchmark. At least that way you can hold them accountable to what THEY say is a fair comparison.
For example, Wintergreen Fund lists the S&P 500 as its benchmark but it has something like 60% of its assets in international stock. Its not a good benchmark for the fund.
Another thing that makes using the managers benchmark an issue is currency exposure. A lot of stock funds will invest something like 80% of their assets in US stock and then the rest in international stock. Are they a domestic stock fund? Over the last 10 years, the dollar has dropped precipitously. All things equal, a fund that had currency exposure in the form of international stock should have out preformed one that didn't. Is the fund with international stock better managed or was it lucky?
Another example is looking at Total return funds that invest a portion in Junk Bonds, they usually compare themselves to the barclay's aggregate but that comparison isn't a good one.
Sometimes stock funds hold BONDS, how can you compare these to pure stock funds?
This makes their performance looks better than it would otherwise, especially on a risk adjusted basis. You really have to look under the hood and I wouldn't assume the prospectus benchmark is a good one.