Manager Universe (Benchmark)

Manager Universe (Benchmark)

Investopedia / Mira Norian

What Is a Manager Universe (Benchmark)?

A manager universe (benchmark) refers to a peer group of investment managers who have the same investment style. It is used to compare the performance of one manager to their peer group, which makes it simpler for investors to choose between the vast number of investment managers.

Key Takeaways

  • A manager universe (benchmark) refers to a peer group analysis of investment managers who have the same investment style.
  • Comparing the performance of one investment manager to their peer group is done through a manager universe (benchmark).
  • A manager universe (benchmark) helps investors make apple-to-apple comparisons amongst investment managers to find out who is the best performer and why.
  • Morningstar and Lipper are two companies that perform manager universe (benchmark) comparisons.
  • Broad manager universe (benchmarks), however, can make it difficult to compare the performance of managers who have different investment styles.
  • A manager universe (benchmark) also has survivorship bias, meaning that managers with poor performance records get dropped from the universe.

Understanding a Manager Universe (Benchmark)

The investment management world is large and broad, encompassing many managers, funds, and investment styles. It can be a difficult task for an investor to choose a vehicle for their investments.

Manager universe (benchmark) data is one of the two main ways to judge the relative performance of an investment vehicle, such as a mutual fund or hedge fund, in order to help make an investment decision. The other is versus an index benchmark. The former complements the latter.

For example, take the universe of actively managed investment-grade bond funds. Say certain funds that have a large percentage of corporate bonds when compared to a benchmark index beat their peer group average in a period of wide yield spreads. All of these funds, however, took on more credit risk than the index to generate this outperformance. The relative comparison of these funds versus the index is therefore limited.

This is when the manager universe (benchmark) comparison is useful, as it then allows for an apples-to-apples comparison of similar funds during a specific time period. Rather than looking at all the funds that outperformed the index, an investor can compare similar funds in a peer group with one another and analyze not only factors such as performance but also risk profiles.

Evaluating a Manager Universe (Benchmark)

Two companies that specialize in manager universe comparisons are Morningstar and Lipper. Asset managers, fund companies, and financial intermediaries recognize benchmarking and classifications from these two companies as industry standards.

For example, Lipper ranks mutual funds in all of its manager universe (benchmark) groups based on five metrics: total return, consistent return, capital preservation, tax efficiency, and expenses. The top 20% of funds in each category receive the highest ratings and are named Lipper Leaders. The company names leaders for three-, five-, and 10-year periods for each category, as well as overall.

Lipper Leaders help investors decide which funds meet their investment goals and match their preferences, although they do not attempt to predict future performance.

Advantages and Disadvantages of a Manager Universe (Benchmark)

Evaluating a manager universe (benchmark) data is a way for investors to comparison shop for funds. While past performance doesn’t provide insight into future performance, knowing that a fund is among the leaders in both total return and consistent returns among its peer group for many years, for example, provides useful information and insights.

This type of research does have shortcomings, however. Broad manager universes make it difficult to compare the performance of managers who have different styles. For example, a universe of large-cap value managers sometimes pits the performance of a dividend growth strategy with a high dividend strategy.

There also is survivorship bias, meaning that managers with poor performance records get dropped from the universe and the universe doesn't present a complete picture of all managers' performance.

Lastly, conclusions from a manager universe (benchmark) data over short time frames are limited, since leadership tends to change often.

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