More Accurately Measure Performance by Comparing Apples to Apples

Provided by Russell Investment Group

If the Dow Jones Industrial Average is skyrocketing while your fund's pool of stocks is making a slow climb, that doesn't necessarily mean that your fund is underperforming. You could be using the wrong benchmark to measure performance.

You can use indexes to track current and historical market performance by specific market segment (large capitalization/small capitalization) or investment style (growth/value).

Mark Hansen, managing director of West Coast Operations for Russell/Mellon Analytical Services, stresses the importance of using the index that most closely approximates the universe of stocks a manager actually chooses from—whether that is large cap, small cap, growth, value, or the broad market.

"Comparing your results against the correct benchmark gives you a more accurate statement of how your fund is performing. And comparing different indexes is a good indication of how different market segments are performing," says Hansen.

To illustrate the importance of using the right benchmark, Hansen points to August 1997. In that month, small-cap stocks were growing, but large-cap stocks were stumbling. A large-cap portfolio that returned 1% would appear to be doing poorly if you compared it to the Russell 2000® Index, which returned 2.29% that month.

As shown in the following graph, if you compare the portfolio's 1% return to the correct benchmark, the Russell 1000® Index, you'll get a different picture. While the large-cap portfolio increased 1%, the large-cap benchmark was down -4.72%. So the portfolio did exceedingly well against its benchmark.

To help you better analyze performance, research analysts at Russell Investment Group developed a coordinated family of indexes, which are briefly described in the following table.

In addition to the daily updates on Russell.com, you can find Russell Indexes published daily in the Wall Street Journal and weekly in Barron's.