Benchmark Checkup
Craig L. Israelsen, Ph.D.
Reprinted from Financial Planning Magazine
iven the performance differentials that can exist among major U.S. equity indexes it is prudent to calculate the average return of several indexes before making comparisons against individual funds or equity portfolios. The five providers of equity indexes evaluated here include Barra, Dow Jones, Morningstar, Russell, and Wilshire.
In Figures 1-3, the one, three, five, and ten year performance figures for various U.S. equity indexes (large cap, mid cap, small cap) are listed. They are further broken out according to the Morningstar style box, i.e. value, blend, and growth. More importantly, the average (or aggregated) return for each group of indexes is also provided.
The "problem" of variance among equity indexes is most evident among small cap indexes. For instance, the 3-year performance figures for Small Cap Growth indexes ranged from 2.60% to 13.69%. Similar differentials, though often not as large, are observed among mid cap and large cap indexes - particularly among growth indexes.
As can clearly be seen, the choice of which index is selected as the "benchmark" against which a particular equity mutual fund will be measured is a crucial decision. Very simply, indexes in the same style box are not identical. The solution to variance among equity indexes is to calculate a group average and then use that average as the benchmark performance figure for that particular style box.
Having determined the average performance of major equity indexes in each style box, the next logical step is to determine which U.S. equity funds are meeting or exceeding the group average. Despite much rhetoric regarding the superiority of passive, index-based funds versus actively managed funds, there are many actively managed funds which provide significant and consistent "excess return", or return in excess of the return of benchmark equity indexes.
This analysis seeks out such funds using a sensible approach. First, "index" performance is determined by the average return of 4-5 indexes (i.e. benchmarks), not just one index. Second, a modified information ratio is used to screen funds which provide returns in excess of aggregated benchmark index returns while also taking into account volatility of return. Third, modified information ratios are calculated for the most recent 12, 36, and 60 months and then summed using a weighted formula. Fourth, only currently available funds are considered. It's largely pointless to highlight funds that are closed or available to only a sub-set of the general population.
Figures 4-6 present the top 10 performing funds in each Morningstar style box as of November 30, 2004. The following filters were used as initial screens in the Morningstar Principia database: U.S. equity funds with at least five years of performance history; no purchase constraints; initial investment requirement of $25,000 or less; and have at least 50% of its portfolio in U.S. equities. Requiring a ten-year performance history would have been preferred, but too many funds were eliminated with that requirement.
Redundant share classes were also removed, meaning that only one share class of a particular fund remained in the final data set. For example, Merrill Natural Resource A (in the large growth style box) has three share classes (A, B, and C). Only share class A is listed in the top 10 funds even though each share class likely qualified. This filtering technique prevents funds with multiple share classes from being over-represented.
Funds that made the top 10 list had the highest modified information (IR) ratios for the previous 1, 3, and 5 year periods. The five year IR was weighted more heavily than the one year and three year IR. Load-adjusted returns were used in calculating the IR so as to prevent load-funds from being unfairly advantaged. Volatility of return is an inherent component of the IR calculation, thus funds with high volatility can only rise to the top of the list by having a correspondingly high "excess return".
Having said that, discretion is always required when selecting funds at the top of any list. For example, in Figure 4 in the Large Cap Blend category, CGM Focus is ranked first. It has had high returns in recent years, but with a high degree of volatility (as measured by 5 year standard deviation of return). Conversely, Oakmark Equity & Income has generated 1, 3, and 5 year returns in excess of the Large Cap Blend averages (shown in Figure 1) but with nearly 80% less volatility.
A key element in Figures 4-6 is that all of the funds (at the time of the analysis) were available to investors without purchase constraints (e.g. closed to new or all investors, institutional and/or qualified access). Moreover, each of the funds has a relatively low investment threshold ($25,000 or less). In most cases, the initial investment requirement is far less than $25,000, with common figures in the range of $1,000 to $5,000. Therefore, the U.S. equity funds in Figures 4-6 represent the "best of class" which are accessible to investors at large.
Those interested in obtaining monthly updates of aggregated benchmark index performance (Figures 1-3) and a detailed printout of the top funds in each style box (Figures 4-6) are encouraged to contact the author at:
craig.israelsen@gmail.com.
Figure 1. Large Cap U.S. Equity Indexes
Data as of November 30, 2004 from Morningstar Principia
|
|
Total Annualized Return
|
|
Large Value Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Barra
Large Cap Value
|
18.98
|
5.86
|
2.58
|
12.02
|
|
Dow Jones
Large Value
|
17.74
|
4.97
|
3.12
|
11.95
|
|
Russell
1000 Value
|
19.66
|
8.22
|
4.68
|
13.58
|
|
Russell
Top 200 Value
|
17.62
|
5.09
|
1.20
|
12.90
|
|
Wilshire
Large Value
|
18.26
|
7.42
|
2.68
|
12.43
|
|
LV
Average
|
18.45
|
6.31
|
2.85
|
12.58
|
|
|
|
Large Blend Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Morningstar Large Cap
|
11.62
|
1.04
|
-4.03
|
11.13
|
|
Russell
1000
|
12.64
|
3.40
|
-1.31
|
11.92
|
|
Standard
& Poor's 500
|
12.85
|
2.73
|
-1.83
|
11.86
|
|
Wilshire
Large Cap 750
|
12.30
|
3.06
|
-2.18
|
11.54
|
|
LB
Average
|
12.35
|
2.56
|
-2.34
|
11.61
|
|
|
|
Large Growth Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Barra
Large Cap Growth
|
6.88
|
-0.49
|
-6.40
|
11.24
|
|
Dow Jones
Large Growth
|
5.18
|
-3.87
|
-13.06
|
7.97
|
|
Russell
1000 Growth
|
5.84
|
-1.51
|
-8.19
|
9.36
|
|
Russell
Top 200 Growth
|
4.19
|
-3.33
|
-9.80
|
9.34
|
|
Wilshire
Large Growth
|
6.35
|
-1.25
|
-8.62
|
9.36
|
|
LG
Average
|
5.69
|
-2.09
|
-9.21
|
9.45
|
Figure 2. Mid Cap U.S. Equity Indexes
Data as of November 30, 2004 from Morningstar Principia
|
|
Total Annualized Return
|
|
Mid Value Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Barra
MidCap Value
|
18.52
|
15.30
|
15.28
|
16.49
|
|
Dow Jones
Midcap Value
|
25.87
|
16.41
|
15.82
|
15.93
|
|
Russell
Midcap Value
|
24.23
|
15.65
|
13.22
|
15.42
|
|
Wilshire
Midcap Value
|
20.14
|
16.83
|
15.62
|
16.22
|
|
MV
Average
|
22.19
|
16.05
|
14.99
|
16.02
|
|
|
|
|
|
|
|
Mid Blend Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Morningstar Mid Cap
|
18.85
|
10.64
|
7.49
|
12.26
|
|
Russell
Midcap
|
18.78
|
12.09
|
8.52
|
14.18
|
|
Standard
& Poor's Midcap 400
|
13.68
|
10.86
|
9.90
|
15.72
|
|
Wilshire
Mid Cap 500
|
16.05
|
11.96
|
9.61
|
14.54
|
|
MB
Average
|
16.84
|
11.39
|
8.88
|
14.18
|
|
|
|
|
|
|
|
Mid Growth Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Barra
MidCap Growth
|
8.84
|
6.30
|
4.78
|
14.83
|
|
Dow Jones
Midcap Growth
|
11.60
|
3.17
|
-2.79
|
9.78
|
|
Russell
Midcap Growth
|
11.40
|
5.83
|
-1.15
|
10.87
|
|
Wilshire
Midcap Growth
|
12.37
|
7.26
|
1.20
|
11.07
|
|
MG
Average
|
11.05
|
5.64
|
0.51
|
11.64
|
Figure 3. Small Cap U.S. Equity Indexes
Data as of November 30, 2004 from Morningstar Principia
|
|
Total Annualized Return
|
|
Small Value Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Barra
SmallCap Value
|
24.41
|
15.84
|
15.28
|
16.10
|
|
Dow Jones
Small Value
|
20.59
|
19.19
|
17.94
|
15.81
|
|
Russell
2000 Value
|
23.72
|
17.90
|
17.39
|
15.24
|
|
Wilshire
Small Value
|
20.97
|
17.79
|
16.18
|
14.99
|
|
SV
Average
|
22.42
|
17.68
|
16.70
|
15.54
|
|
|
|
|
|
|
|
Small Blend Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Morningstar Small Cap
|
19.51
|
13.51
|
11.11
|
12.56
|
|
Russell
2000
|
17.26
|
12.63
|
8.28
|
11.50
|
|
Standard
& Poor's Smallcap 600
|
22.12
|
14.92
|
12.88
|
14.31
|
|
Wilshire
Small Cap 1750
|
16.82
|
12.37
|
8.23
|
12.47
|
|
SB
Average
|
18.93
|
13.36
|
10.13
|
12.71
|
|
|
|
|
|
|
|
Small Growth Indexes
|
1
Yr
|
3
Yr
|
5
Yr
|
10
Yr
|
|
Barra
SmallCap Growth
|
19.82
|
13.69
|
9.08
|
11.58
|
|
Dow Jones
Small Growth
|
11.09
|
2.60
|
-1.04
|
9.45
|
|
Russell
2000 Growth
|
10.84
|
6.69
|
-1.09
|
6.99
|
|
Wilshire
Small Growth
|
12.95
|
6.58
|
-2.61
|
7.72
|
|
SG
Average
|
13.68
|
7.39
|
1.09
|
8.94
|
Figure 4. Top 10 Available Large Cap U.S. Equity Funds
Based on 1, 3, and 5 Year Modified Information Ratio
Data as of November 30, 2004
|
|
Load-Adjusted Total Return (%)
|
|
|
Large Cap Value Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
Vanguard Energy
|
55.20
|
25.58
|
20.17
|
23.75
|
|
Fidelity Select Industrial Materials
|
22.36
|
19.82
|
13.14
|
24.33
|
|
Hancock Classic Value C
|
15.66
|
12.44
|
16.19
|
21.00
|
|
Fidelity Select Home Finance
|
12.46
|
15.55
|
15.53
|
22.61
|
|
Nuveen NWQ Multi-Cp Val B
|
21.79
|
16.14
|
13.56
|
23.15
|
|
Yacktman
|
11.90
|
16.98
|
17.47
|
18.14
|
|
T. Rowe Price Cap Appreciation
|
18.61
|
13.22
|
14.00
|
10.93
|
|
Hotchkis Wiley Large Value A
|
16.59
|
14.30
|
11.68
|
19.44
|
|
FBR Large Cap Financial
|
10.62
|
12.38
|
12.66
|
21.45
|
|
Franklin Income C
|
14.08
|
12.01
|
10.92
|
9.46
|
|
Large Cap Blend Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
CGM Focus
|
19.64
|
19.06
|
30.65
|
44.18
|
|
Muhlenkamp
|
20.66
|
14.06
|
14.88
|
26.57
|
|
Oakmark Equity & Inc I
|
12.54
|
10.21
|
13.69
|
9.84
|
|
Ariel Appreciation
|
12.86
|
9.68
|
12.59
|
18.18
|
|
Mairs & Power Growth
|
17.72
|
10.47
|
12.07
|
14.34
|
|
AIM Energy A
|
48.37
|
19.17
|
16.76
|
31.56
|
|
Davis Opportunity C
|
11.08
|
10.32
|
9.00
|
22.79
|
|
T. Rowe Price New Era
|
45.13
|
19.79
|
14.25
|
20.92
|
|
Franklin Rising Div C
|
8.30
|
9.92
|
11.01
|
14.35
|
|
AmSouth Select Equity I
|
9.64
|
8.32
|
8.68
|
14.14
|
|
Large Cap Growth Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
Merrill Natural Resources A
|
39.88
|
22.32
|
17.81
|
27.49
|
|
Fidelity Select Med Equipment
|
14.12
|
12.93
|
17.93
|
14.15
|
|
Calamos Growth C
|
14.09
|
11.68
|
14.22
|
34.49
|
|
Calamos Gr & Inc C
|
7.48
|
8.96
|
9.53
|
17.17
|
|
Exeter Pro-Blend Extend A
|
13.64
|
6.04
|
8.06
|
11.60
|
|
Vanguard Health Care
|
8.50
|
4.77
|
11.81
|
13.33
|
|
Salomon Bros Capital A
|
9.95
|
5.12
|
7.36
|
20.89
|
|
Fidelity Asset Mgr: Inc
|
5.70
|
6.10
|
5.01
|
4.96
|
|
Exeter Pro-Blend Mod A
|
10.55
|
5.17
|
7.19
|
8.38
|
|
Transamerica Balance Inv
|
13.17
|
6.47
|
6.48
|
12.70
|
Figure 5. Top 10 Available Mid Cap U.S. Equity Funds
Based on 1, 3, and 5 Year Modified Information Ratio
Data as of November 30, 2004
|
|
Load-Adjusted Total Return (%)
|
|
|
Mid Cap Value Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
Alpine Realty Inc & Growth Y
|
26.28
|
25.21
|
23.90
|
14.03
|
|
Phoenix-Duff Real Estate B
|
25.74
|
24.08
|
23.06
|
16.01
|
|
AIM Real Estate B
|
28.04
|
24.51
|
22.98
|
15.46
|
|
Strategic Part Real Estate B
|
31.57
|
27.74
|
22.10
|
16.72
|
|
Ivy Real Estate Securities B
|
25.06
|
24.22
|
21.73
|
15.74
|
|
First Amer Real Estate Sec B
|
23.17
|
21.92
|
21.51
|
15.87
|
|
Scudder RREEF Real Estate B
|
23.43
|
22.17
|
21.20
|
15.97
|
|
Cohen & Steers Realty Focus I
|
37.67
|
29.05
|
22.08
|
21.06
|
|
AmCent Real Estate Inv
|
27.81
|
23.38
|
21.87
|
15.98
|
|
Principal Real Estate Sec B
|
25.39
|
22.74
|
20.85
|
16.39
|
|
Mid Cap Blend Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
Third Avenue Real Estate Value
|
28.12
|
22.68
|
23.15
|
11.58
|
|
RS Contrarian Value
|
31.15
|
29.51
|
18.49
|
18.82
|
|
Fidelity Select Constr & Housing
|
19.03
|
19.16
|
16.57
|
24.31
|
|
CRM Mid Cap Value Ret
|
26.51
|
15.31
|
22.97
|
20.69
|
|
Security Mid Cap Value A
|
22.90
|
16.76
|
17.73
|
23.14
|
|
T. Rowe Price Mid Value
|
23.76
|
16.50
|
16.68
|
18.13
|
|
Ariel
|
22.34
|
15.03
|
17.67
|
17.86
|
|
Quaker Small-Cap Value C
|
15.81
|
15.65
|
14.35
|
20.04
|
|
Van Eck Global Hard Asset A
|
26.58
|
23.55
|
13.81
|
21.12
|
|
Fidelity Select Medical Del
|
38.22
|
16.26
|
21.60
|
24.66
|
|
Mid Cap Growth Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
JennDry Jenn Nat Resources B
|
35.49
|
31.37
|
20.87
|
30.13
|
|
Royce Premier Inv
|
23.89
|
17.83
|
16.02
|
18.02
|
|
Meridian Growth
|
11.42
|
12.68
|
15.20
|
21.32
|
|
Strong Discovery
|
13.45
|
12.53
|
11.45
|
22.21
|
|
Columbia Acorn Select Z
|
17.18
|
12.98
|
11.76
|
17.22
|
|
ICON Healthcare
|
11.76
|
11.11
|
15.75
|
19.92
|
|
Munder Mid Cap Select B
|
12.98
|
10.63
|
11.83
|
20.89
|
|
Mosaic Mid Cap
|
15.71
|
10.00
|
12.97
|
16.00
|
|
First Amer Mid Cap Gr Opp B
|
11.34
|
9.09
|
10.61
|
21.45
|
|
Federated Kaufmann C
|
9.04
|
8.57
|
11.52
|
26.52
|
Figure 6. Top 10 Available Small Cap U.S. Equity Funds
Based on 1, 3, and 5 Year Modified Information Ratio
Data as of November 30, 2004
|
|
Load-Adjusted Total Return (%)
|
|
|
Small Cap Value Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
Alpine U.S. Real Estate Y
|
22.85
|
36.05
|
29.04
|
27.98
|
|
Pacific Cap Small Cap C
|
22.53
|
21.86
|
21.66
|
20.40
|
|
American AAdv Sml Cap Value
|
24.92
|
21.71
|
21.21
|
23.00
|
|
FBR Small Cap Financial
|
17.36
|
26.04
|
24.68
|
14.48
|
|
Spirit of Amer Real Estate B
|
17.82
|
18.50
|
19.60
|
15.02
|
|
Berwyn
|
28.21
|
20.16
|
18.38
|
18.95
|
|
James Small Cap
|
24.28
|
23.58
|
16.45
|
22.19
|
|
PIMCO NFJ Small Cap Value B
|
22.60
|
18.26
|
17.33
|
15.46
|
|
Royce Opportunity Inv
|
15.75
|
20.45
|
19.61
|
28.20
|
|
Strategic Part Small Value B
|
16.86
|
16.29
|
16.36
|
17.15
|
|
Small Cap Blend Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
Munder Small Cap Value B
|
19.83
|
19.15
|
19.34
|
20.28
|
|
Emerald Banking & Fin C
|
21.21
|
26.07
|
19.83
|
13.54
|
|
Stratton Small Cap Value
|
26.45
|
20.76
|
17.53
|
19.85
|
|
Lord Abbett Small Cap Val P
|
22.84
|
17.42
|
18.49
|
19.92
|
|
Tamarack Enterprise C
|
16.62
|
18.81
|
17.55
|
18.89
|
|
Pennsylvania Mutual Inv
|
21.06
|
17.30
|
16.98
|
18.35
|
|
Undiscovered Mg Behav Val C
|
22.52
|
19.61
|
16.20
|
25.72
|
|
Royce Micro-Cap Inv
|
15.45
|
16.98
|
18.41
|
23.43
|
|
Perritt Micro Cap Opport
|
14.40
|
25.50
|
23.72
|
31.92
|
|
CNI Charter RCB Small Value A
|
19.86
|
16.59
|
16.10
|
19.94
|
|
Small Cap Growth Funds
|
1
Year
|
3
Year
|
5
Year
|
Std Dev
5 Yr
|
|
UMB Scout Small Cap
|
26.92
|
15.51
|
15.28
|
14.00
|
|
Independence Small Cap
|
23.30
|
14.03
|
14.88
|
24.03
|
|
Schroder US Opport Inv
|
25.03
|
13.16
|
16.14
|
20.13
|
|
First Amer Small Cap Sel C
|
16.03
|
12.15
|
13.20
|
25.71
|
|
Munder Micro-Cap Equity C
|
18.34
|
16.78
|
11.35
|
37.06
|
|
Forward Hoover Small Cap Eq
|
17.24
|
12.68
|
11.83
|
24.22
|
|
Value Line Emerging Opp
|
13.52
|
11.01
|
11.15
|
28.11
|
|
Heritage Small Cap Stock C
|
12.61
|
10.56
|
9.64
|
24.14
|
|
Excelsior Small Cap
|
21.16
|
15.09
|
9.94
|
29.49
|
|
Vanguard Small Cap Grth Index
|
11.68
|
12.64
|
8.80
|
25.89
|
____________________________________________________________________________________
Craig L. Israelsen, Ph.D. is an associate professor at Brigham Young University. He teaches family finance in the Department of Home and Family Living. His research interests include mutual fund analysis. He writes monthly for Financial Planning magazine.
|
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