Fund performance may look distinctly measurable, but the truth is it’s always in the eye of the beholder.
For every buyer who favours one metric, there will be another who will point to several other ways of assessing a portfolio.
Like it or not, however, active funds tend to attract most criticism if they’ve underperformed against their benchmark. But I wonder whether one group in particular are being harshly done by.
For global equity funds, outperformance statistics make dismal reading. In 2014, when the S&P 500 beat the MSCI World index by more than 8 percentage points, just 25 per cent of the sector outperformed the benchmark.
Last year, the difference between the two indices amounted to less than 200 basis points. It may not be a coincidence that the proportion of funds outperforming rose to 40 per cent.
To be clear, this is still a very poor figure. Blaming the benchmark can look a little like a bad workman pointing the finger at his tools.
But there can be no denying funds are losing out from this comparison because of the way US stocks dominate global indices.
The country’s corporates now make up 59 per cent of the MSCI World index. That’s a huge benchmark risk for global managers who are trying to do the right thing and diversify their portfolios.
Even if they favour the region, it’s very hard to take a meaningful overweight position without becoming a US equity fund in all but name.
The situation could be improved by a slump in US performance relative to other regions, but the list of countries that could plausibly overtake it as the driver of global market performance looks slim.
In the meantime, global funds’ relative performance – whatever the merits of such a metric – will continue to come in for significant criticism, regardless of managers’ actual ability.
It’s not the only case of benchmark concentration to have reared its head recently. Apple’s shares may have started to underperform, but the firm still dominates technology indices.
And plenty are concerned about the impact of Chinese A-shares joining emerging market indices at some point in the future. They’d account for more than 20 per cent if were they ever to be represented in full.
The maturity of the Chinese market can hardly be compared with that of the US, but the principle is the same.
The industry already has a greater focus on outcome-based investing. This shouldn’t let poor managers off the hook, but when you consider how benchmark composition can skew figures, there should be greater awareness of exactly how and why this is happening.
Dan Jones is editor of Investment Adviser