Actively managed funds and their benchmarks

Any respectable fund nowadays will compare itself with the benchmark index that most matches its holdings. There's a few problems with these types of comparisons, though.

First, any fund that invests in stocks outside of the index deviates from the index. For a fund whose composition only has a handful of non-index holdings, that may not be such a big deal. But what about those funds whose holdings are very different from the index. Is it really a legitimate comparison? And how fair is it to compare two funds that benchmark themselves against the same index, but when compared with each other, have almost nothing in common? This leads me to ask: Are there any standards in the funds industry for comparing performance in the case of funds whose holdings don't closely match any index?

Second, some fund companies create their own indices in order to provide a benchmark for investors. The benchmarks can be questionable. Case in point: Fidelity Global Balanced Fund, which compares itself to the "Fidelity Global Balanced Composite Index." According to page IV of the Shareholder Update for this fund, this Fidelity-created index is a "60%/40% blend" of the Morgan Stanley Capital International (MSCI) World Index and the Citigroup World Government Bond Index. Only problem: The Global Balanced Fund, according to its own annual report, has 62% stocks and equity futures, 21% bonds, and 17% "short-term investments and net other assets".

In this case, I believe Fidelity's Global Balanced Fund would look even more attractive if a cash element was added to the "Fidelity Global Balanced Composite Index", but of course tweaking their own index might work against them next quarter.

Caveat emptor ...


Read this post on PFBlog.com/fidelityobserver -- Reader comments often appear there that won't show up on this page. You can leave comments on either page, I'll read 'em all!