Course 202: Benchmarks
Peer Groups as Benchmarks
In this course
1 Introduction
2 Your Personal Benchmark
3 Indexes as Benchmarks
4 Peer Groups as Benchmarks
5 Our Approach

The second type of 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 categories are suitable peer-group benchmarks for most mutual funds. Depending on what a fund owns, it can land in one of more than 40 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. Consider Fidelity Blue Chip Growth (FBGRX). The fund's returns lagged the S&P 500 in the early 2000s. Against that benchmark, the fund looked like a dog. But against its peers, the fund looked pretty good, especially in 2001 and 2002, when it lost less than its rivals. Of course, losing less than other funds is cold comfort for investors, but the fact that Fidelity Blue Chip Growth trailed the S&P 500 in the early 2000s 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. Fast forward to more recent time: Over the trailing five years through May 2011, large-growth funds have outperformed large-value, and this fund has beaten both the S&P 500 and more than 85% of its peers.

Next: Our Approach >>


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