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Do You Know How Well Your Mutual Fund Has Done This Year?

Financial Planning

September 2000

Do You Know How Well Your Mutual Fund Has Done This Year?

If you are like most investors, you look at your funds periodic statement and if the value of your mutual fund has gone up, then you think the fund must be doing fine. Or maybe you are like other investors and sell your fund if it has not performed as well or better than the S&P 500 or the Nasdaq 100 Index. Regardless of which type of investor you are, you will not know how well your fund has done unless you are comparing that funds performance to the proper benchmark, or the proper index.

To which index should you compare your fund? In the following article, we will describe some of the indexes available and help you determine to which index your funds should be compared. Please note that the list of indexes described in this article may not be appropriate for all funds. For best results in using a benchmark, choose the best index available for your type of fund.

Lets describe some key benchmarks, or indexes, and see how well each performed in 1999. The benchmarks we will talk about are the Morningstar Asset Class Average, the Russell 2000 Index, the Russell 1000 Value Index, the Wilshire 4500 Completion Index, Lipper Equity Income Index, Lipper Growth and Income Index, S&P 500, and the Nasdaq 100 Index. A chart of how well each performed in 1999 is also presented.

  • The Morningstar Asset Class Average. An index average is provided for each asset class, noting that the categorization of each fund is assigned by Morningstar.

  • The Russell 2000 Index. This index represents the lower two-thirds, in terms of capitalization, of the Russell 3000 Index, which is composed of all major publicly traded U.S. companies.

  • The Russell 1000 Index. The largest 1000 companies in the Russell 3000.

  • The Wilshire 4500 Completion Index. A broad index based on the Wilshire 5000 stock index, with stocks from the S&P 500 removed.

  • Lipper Equity Income Index. Stocks from the 30 largest funds that have a high current income and growth of income investment strategy.

  • Lipper Growth and Income Index. Stocks from the 30 largest funds that combine a growth-of-earnings orientation with an income requirement level or rising dividends.

  • Standard & Poor 500 (S&P 500). 500 stocks chosen for market size, liquidity and industry group representation.

  • Nasdaq 100 Index. The largest industries across major industry groups, including technology, telecommunications and retail or wholesale trade with an average daily trading volume of 100,000 shares.

1999 returns for each of the indexes described above except Morningstar.

Now, let's decide to which index we compare our mutual fund. First, you must identify your fund's asset class. The asset class may be found in the funds prospectus or by directly calling the fund. Basically, a fund's asset class will be broken down in either of three groups, large cap, mid cap, or small cap.
  • large cap funds - invest in companies capitalized at $9 billion or above
  • mid cap funds - invest in companies capitalized between $1.5 billion and $9 billion
  • small cap funds - invest in companies capitalized below $1.5 billion

Next, decide to which investment philosophy the fund's manager adheres. There are basically two types of philosophies - growth or value.

  • Growth investors specialize in hot or emerging markets and companies with high P/E, price-to book, and price-to-cash-flow ratios.
  • Value investors buy stocks that are "on sale", or shares they believe are underpriced.

Lastly, identify the fund manager's substyle. Along with an investment philosophy, most managers will also have a "substyle." For example, in the growth category, the substyles are earnings momentum or consistent earnings. In the value category the substyles are growth at a reasonable price, contrarian, or yield. A description of each follows:

  • Earnings momentum - funds designed for investors who have an appetite for risk. Typically, these stocks have high P/E ratios, high price-to-book ratios, and high price-to-cash-flow ratios as well as extremely high growth rates. These will include the cutting edge technology stocks.
  • Consistent earnings - these funds will contain established blue-chip companies that have higher growth rate than most other large cap companies. These typically include companies such as IBM, Johnson & Johnson and GE.


  • Growth-at-a-reasonable-price - typically include growth stocks, however, may also include stocks that are undervalued or "on sale".
  • Contrarian - funds that contain stocks with extremely low ratios across the board. The fund's weighted-average P/E ratio, price-to-book ratio and price price-to-cash-flow ratios all will be way below the S&P 500 average.
  • Yield - includes stocks that pay higher dividends. These funds may contain many bank stocks.

Once you know your funds asset class, the type of investment philosophy to which the funds manager adheres, and the manager's substyle, then you are ready to determine how well your fund has performed by comparing it to the correct benchmark, or index. Below is a list of the categories of funds and the indexes to which they should be compared.

Your FundBenchmark Index
A. Large Cap Morningstar, Russell 1000
  1. Growth Russell 1000 Growth
    a. Earnings momentum Nasdaq 100
    b. Consistent earnings S&P 500
  2. Value Russell 1000 Growth
    a. Growth at a reasonable price   Lipper Growth & Income
    b. Contrarian Morningstar, Russell 1000
    c. Yield Lipper Equity Income
B. Mid Cap - all Morningstar, Wilshire 4500
C. Small Cap - all Morningstar, Wilshire 4500,Russell 2000

As an example, let's say that your fund falls in the large cap category, that the fund manager's philosophy is one of growth, and the fund manager's substyle is earnings momentum. In this case, the best benchmark for comparison for your fund would be the Nasdaq 100 index. You could, however, also use Morningstar or The Russell 1000 indexes, as these are the indexes that all large cap funds may use.

The procedures outlined above are just one tool to help you determine how well your mutual fund has performed. By comparing your fund to the proper benchmark, you will have a better idea of how well your fund has performed and thus be able to make better decisions on when to sell and when to keep the fund.

Now… do you know how well your mutual fund has performed this year?

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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