|
|
|
|
 |
|
Using Indexes as Benchmarks
More Accurately Measure Performance by Comparing Apples to Apples
If the TSE 300 Index or the Dow Jones Industrial Average are 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.
Comparing Apples to Apples
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 (United States) 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, US 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.
An Example Comparison
Analyzing Performance with the Russell Indexes
To help investors better analyze performance, research analysts at Frank Russell Company have developed a coordinated family of indexes for the US market and in markets around the world. Some if the most well known are described below:
Russell 3000® Index
Represents the US equity market — it covers about 98% of all investable stocks in the United States. To measure your fund performance against the US equity markets as a whole, check it against the Russell 3000.
Russell 1000® Index
Composed of the 1,000 largest companies in the Russell 3000 (about 90% of its total value). The Russell 1000 is further divided into two style indexes: The Russell 1000® Growth Index measures the growth stocks within the Russell 1000, while the Russell 1000® Value Index measures the performance of value stocks within the Russell 1000.
Russell 2000® Index
Measures small-cap stocks. It comprises the smallest 2,000 stocks in the Russell 3000 (about 10% of the total value). The Russell 2000 is also broken into two style indexes: the Russell 2000®Growth and the Russell 2000® Value Indexes.
Russell 300™ Value
Combines the Russell 100™ and the Russell 200™ Value Indexes. Stocks in this index generally have low price-to-book and price-earnings ratios, higher dividend yields, and lower forecasted growth values than more value-oriented stocks in the Russell 300™ Growth Index.
Russell 300™ Growth
Combines the Russell 100™ and the Russell 200™ Growth Indexes. Companies in this index tend to exhibit higher price-to-book and price-earnings ratios, lower dividend yields, and higher forecasted growth values than more value-oriented stocks in the Russell 300™ Value Index.
|
|
|
|
Products and services described on these websites are intended for Canadian residents only. Information on these sites should not be considered a solicitation to buy or an offer to sell a security to any person. Persons outside Canada may find more information about products and services available within their jurisdictions by going to Russell's worldwide site, http://www.russell.com.
Legal Information Privacy Policy
Required Sales Disclosure
© Russell Investments Canada Limited 2009. All Rights Reserved.
|
