Larry E. Swedroe, chief research officer at Buckingham Strategic Wealth, which oversees more than $26 billion in assets, St. Louis. BuckinghamStrategicWealth.com
How is your stock mutual fund doing this year? A lot depends on which index the fund compares its returns to. Problem: Many funds mislead investors by switching their benchmark index to improve the appearance of their performance. SEC regulations require funds to benchmark their one-, five- and 10-year performances against an “appropriate” index. Example: A fund that owns large-cap growth and value stocks could compare its performance to the S&P 500’s returns.
Recent finding: A new study tracked nearly 3,000 stock funds for 13 years. Result: Not only did 37% of the funds change their benchmark index, but about two-thirds of the time, the new index had lower returns than the old one. Also: About 60% of the time, the new index was not reflective of the fund’s investment strategy.
Recent example: Parametric Dividend Income Fund invests in small-, mid- and large-cap dividend-paying stocks from the Russell 3000 index. Its initial benchmark was the Nasdaq US Dividend Achievers Select Index, which tracks companies of all sizes. The fund’s returns trailed the benchmark index by 0.7 percentage points annually. When the fund changed its benchmark to the Russell 1000 Value Index, which tracks mostly large-cap stocks in 2018, it beat the new index’s returns by 1.5 percentage points annually.
If you want an objective comparison of how a fund is doing: Go to the fund’s data page on Morningstar.com. Click on the “Performance” tab, then scroll down to “Trailing Returns” to find the fund’s one-, three-, five-, 10- and 15-year returns, as well as the comparative returns of an appropriate benchmark index selected by Morningstar analysts.