Comparison Universe

What Is a Comparison Universe?

A comparison universe is a grouping of professionally managed investment portfolios or funds with similar mandates and objectives that serves as a benchmark for performance. That is, the performance of each managed portfolio or fund can be readily measured against the average for all members of the peer group.

Lipper and Morningstar are the companies that create the most-used comparison universes. 

Key Takeaways

  • A comparison universe is a grouping of similar professionally-managed funds created as a measure of the relative performance of each of its components.
  • The comparison universe becomes a benchmark against which the professional manager's results are compared. The manager may match, exceed, or underperform the universe.
  • Lipper and Morningstar are the two main sources of comparison universes in the U.S.

Understanding a Comparison Universe

Index Benchmark vs. Comparison Universe

The performance of a professionally-managed portfolio or fund can be evaluated in two ways:

  • The first is the index benchmark. Every mutual fund or professionally-managed portfolio is created with the goal of exceeding the performance of an index that best reflects its choice of stocks. A mutual fund made up primarily of energy stocks might have the stated aim of meeting or beating the performance of the S&P 500 Energy index in the same period.
  • The second is the comparison universe. In this case, a fund or portfolio's performance is compared against the average performance of the universe of similar portfolios.

Lipper Group and Morningstar

The Lipper Group, now owned by Thomson Reuters, was the first to create comparison universes as a means of comparing the relative performance of fund managers, in 1973. The manager of a fund that exceeds its peer universe has bragging rights to a performance that is "above the Lipper Group average."

Morningstar, Inc., the Chicago-based financial services company, produces its own comparison universe groups. They are not radically different but financial firms generally pick one or the other to use as a reference.

Both companies create separate universes for large-cap funds, small-cap funds, and everything in between. Moreover, the companies offer comparison universes for sectors, international funds, and assets other than stocks, such as investment-grade bonds.

They also track universes of blended funds that incorporate stocks, bonds, and other high-yield investments such as preferred stocks. 

Pros and Cons of a Comparison Universe

Cons

Some critics consider both versions of comparison universes to be too broad to be effective gauges of fund performance. For example, a fund manager who handles a value stock fund might object to a direct comparison of the fund's performance with Morningstar’s large-cap comparison universe.

Another perceived drawback is that a comparison universe by nature might set an unrealistically high benchmark by either excluding poorly-performing managers who are no longer in business or by including those whose assets are merged with those of another manager. This latter issue is called survivorship bias.

Pros

The size of the fund or money management firm in terms of assets under management is another consideration in creating a relevant comparison universe. The best money managers generally figure in the top quartile of their comparison universes on a consistent basis, not just for a few quarters or a few years.

The benefit of a comparison universe is that it offers another type of benchmark entirely. A portfolio that consistently beats its index benchmark but regularly falls short of its comparison universe is demonstrating a problem: Either it’s in the wrong comparison universe or its benchmark is too easy to beat. That could be because the fund routinely takes on more relative risks than are reflected in the index.

Article Sources

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  1. Morningstar. "The Morningstar Category Classifications," Page 7. Accessed February 28, 2021.

  2. Thomson Reuters. "The Lipper Leader Rating System: US Methodology," Page 4. Accessed February 28, 2021.

  3. Thomson Reuters. "Reuters acquires the Fund Information Business of Lipper Analytical Services Inc." Accessed February 28, 2021.

  4. Morningstar. "The Morningstar Rating for Funds: A Good Starting Point for Investors?" Accessed February 28, 2021.

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