Manager Universe Can Help in Investments Decision-Making

What is the Manager Universe (Benchmark)?

Do you have a hard time picking your investment manager? It can be pretty challenging because there is a massive number of options out there. However, investment managers with the same investment style have a peer group that we call the “manager universe (benchmark).” It is a comparison between one manager’s performance to another to their peer group. Thanks to this peer group, it is easier for investors to choose among the pool of investment managers.

It is not a secret that investment management is massive. There are different managers, investment styles, and funds. Hence, it may be a confusing and complicated task for an investor to pick an investment vehicle. There are two significant ways to judge an investment vehicle’s relative performance, which helps make a sound investment decision. And when we say investment vehicle, we may be referring to mutual funds or hedge funds. First, we have the manager universe (benchmark), which complements the second one, which is the index benchmark.

Let us say that we have a universe of investment-grade bond funds which are actively managed. For instance, some funds take a significant percentage of corporate bonds than benchmark index is beyond their peer group average in a big yield spread period. But all these funds have more credit risk than the index to end up with this outperformance. The comparison between these funds and the index is thus limited.

Now, we will know why the manager universe (benchmark) is helpful. It gives us an apple-to-apple comparison of similar funds for a given time frame. Investors can compare matching funds in the peer group and study every factor, including performance and risk profiles, instead of simply looking at every fund that outperformed the index.

Let us evaluate

Have you heard of Morningstar and Lipper? These are the top two companies that specialize in manager universe comparisons. Professionals like asset managers, financial mediators, fund companies, and the like agree that these two are up to standards.

Let us start with Lipper, which ranks mutual funds in all of its groups of manager universe. Its bases are five metrics:

• Total return
• Consistent return
• Capital preservation
• Tax efficiency
• Expenses

We have funds that we call Lipper Leaders, and they belong in the top 20% in every category. They receive the highest ratings. Thanks to Lipper leaders, it is easier for investors to pick funds that meet their investment goals and perfectly match their preferences. However, they cannot predict future performances.

Should I use manager universe?

Manager universe (benchmark) data is helpful to investors when they compare funds. Indeed, past performance does not have anything to do with future performance. However, it helps investors know which among these funds lead total and consistent return among its peer group throughout history. This information and insights massively help in decision-making.

On the other hand, the manager universe also has its share of disadvantages. A vast manager universe has massive managers with a different styles. Hence, it may still be challenging to make comparisons. Another disadvantage includes a survivorship bias. Ill-performing managers get eliminated from the universe, and the universe does not let investors know all the details about a manager’s performance. Also, manager universe (benchmark) data conclusions for a short time frame are limited because leadership may change anytime.