Outperform

Loading the player...

What is 'Outperform'

Outperform is when an investment is expected to perform better than the return generated by a particular index or the overall market. Since the performance of many investments is compared to a benchmark index, outperform refers to generating a higher return than a particular benchmark over time. Outperform also refers to an analyst’s rating on a security, and outperform is a better rating than neutral and worse than a strong buy recommendation.

BREAKING DOWN 'Outperform'

An index is made of securities in the same industry, or of companies that have a similar size in terms of market capitalization. Smart decisions by senior management can help a company grow revenue and earnings faster than its competitors, or can help bring a new product to market quickly and capture more market share. Analysts identify these conditions and use them to forecast price appreciation for high-performing companies.

Assume, for example, that XYZ mutual fund uses the Standard & Poor's 500 index as a benchmark. A portfolio manager analyzes stocks with a market capitalization similar to securities in the index and forecasts that 15 particular stocks will generate a higher rate of earnings per share (EPS) than the average for the index. Based on this analysis, the mutual fund increases its holdings in the 15 stocks that are expected to outperform the index.

Examples of Analyst Ratings

A rating is an analyst’s opinion about the rate of return for a particular company’s stock, which includes the stock’s price appreciation and dividends paid to shareholders. The investment industry does not have a standard method that is used by all analysts to rate stocks. A higher rating means that the stock’s price will outperform similar companies over a specified period of time.

The most common use of outperform is for a rating that is above a neutral or hold rating and below a strong buy rating. Outperform means that the company will produce a better rate of return than similar companies, but the stock may not be the best performer in the index. An analyst’s performance is evaluated based on how stocks actually perform after a rating is assigned.

How Portfolio Managers Are Ranked

If a portfolio manager consistently picks stocks that outperform the benchmark, the mutual fund or exchange-traded fund will produce higher rates of return. Money managers are ranked based on the portfolio rate of return and how those returns compare to the benchmark. Financial sites, such as Morningstar, group funds by benchmark and rank every fund in order by its performance compared to the index. Financial sites also compare the return generated by a fund to the volatility of the portfolio over time.

RELATED TERMS
  1. Enhanced Indexing

    An investment philosophy that attempts to amplify the returns ...
  2. Index Hugger

    A managed mutual fund that tends to perform much like a benchmark ...
  3. Active Return

    The percentage gain or loss of an investment relative to the ...
  4. Benchmark

    A standard against which the performance of a security, mutual ...
  5. Composite

    A grouping of equities, indexes or other factors combined in ...
  6. Excess Returns

    Investment returns from a security or portfolio that exceed a ...
Related Articles
  1. Investing

    What Does It Mean When an Investment Outperforms?

    Stock analysts use the term “outperform” to rate a stock.
  2. ETFs & Mutual Funds

    3 Mutual Funds for Up and Down Markets

    Find out more about the top three mutual funds that have consistently outperformed broad market indices in bull and bear market conditions.
  3. ETFs & Mutual Funds

    Analyzing Mutual Funds For Maximum Return

    Using a few simple metrics will help you pick the right fund for your portfolio.
  4. ETFs & Mutual Funds

    Active Share Measures Active Management

    A 2006 study proves the effectiveness of a new way of sizing up your portfolio manager.
  5. ETFs & Mutual Funds

    The Lowdown On Index Funds

    If you can't beat the market, why not join it? Read on to go over your options.
  6. ETFs & Mutual Funds

    The 4 Best U.S. Equity Index Mutual Funds

    Find out which four index mutual funds are among the best U.S. equities index mutual funds for core holdings in your investment portfolio.
  7. Managing Wealth

    Market Focus: Aristocracy in the S&P 500

    We make an analysis into what narrow stock leadership means and whether we may be in an equity market bubble.
  8. Markets

    4 Reasons Why Fund Managers Prefer Individual Stocks (BRK-A, VOO)

    Learn about some of the reasons why fund managers prefer trading in individual stocks over index funds, despite their overall cost savings.
  9. Investing

    How to Evaluate Stock Performance

    Learn how to evaluate stock performance. While what you look for in a stock could be different from another person, the way you analyze performance is the same.
  10. ETFs & Mutual Funds

    Choose A Fund With A Winning Manager

    We break down the key components of analyzing a fund manager's performance so you can find a winner.
RELATED FAQS
  1. What should I use as a benchmark for my small-cap stock portfolio?

    When creating a stock portfolio, it is important to have a benchmark against which you can compare your returns. Comparing ... Read Answer >>
  2. How do you calculate the excess return of an ETF or indexed mutual fund?

    Read about how to calculate and interpret the expected return generated by an exchange-traded fund (ETF) and an indexed mutual ... Read Answer >>
  3. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Understand what tracking error is and learn about the significant difference it can represent for investors who favor index ... Read Answer >>
  4. What's the difference between an index fund and an actively managed fund?

    Learn the difference between actively-managed funds and index funds. Explore the risks and benefits associated with each ... Read Answer >>
  5. What is the difference between passive and active portfolio management?

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
  6. What's the difference between absolute and relative return?

    Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center