Delynn Dolan Alexander : Northwestern Mutual - Using Indexes as Benchmarks : Article: Using Indexes as Benchmarks

Using Indexes as Benchmarks

More Accurately Measure Performance by Comparing Apples to Apples

Provided by Russell Investment Group

If the Dow Jones Industrial Average is skyrocketing while your fund's pool of stocks is making a slow climb, that doesn't necessarily mean that your fund is underperforming. You could be using the wrong benchmark to measure performance.

Comparing Apples to Apples

You can use indexes to track current and historical market performance by specific market segment (large capitalization/small capitalization) or investment style (growth/value).

Mark Hansen, managing director of West Coast Operations for Russell/Mellon Analytical Services, stresses the importance of using the index that most closely approximates the universe of stocks a manager actually chooses from—whether that is large cap, small cap, growth, value, or the broad market.

"Comparing your results against the correct benchmark gives you a more accurate statement of how your fund is performing. And comparing different indexes is a good indication of how different market segments are performing," says Hansen.

To illustrate the importance of using the right benchmark, Hansen points to August 1997. In that month, small-cap stocks were growing, but large-cap stocks were stumbling. A large-cap portfolio that returned 1% would appear to be doing poorly if you compared it to the Russell 2000® Index, which returned 2.29% that month.

As shown in the following graph, if you compare the portfolio's 1% return to the correct benchmark, the Russell 1000® Index, you'll get a different picture. While the large-cap portfolio increased 1%, the large-cap benchmark was down -4.72%. So the portfolio did exceedingly well against its benchmark.

Protfolio vs Indexes

Analyzing Performance with the Russell Indexes
To help you better analyze performance, research analysts at Russell Investment Group developed a coordinated family of indexes, which are briefly described in the following table.

Russell 3000® Index	Represents the U.S. equity market—it covers about 98% of all investable stocks in the United States. To measure your fund performance against the U.S. equity markets as a whole, check it against the Russell 3000.
Russell 1000® Index	Composed of the 1,000 largest companies in the Russell 3000 (about 90% of its total value). The Russell 1000 is further divided into two style indexes: The Russell 1000® Growth Index measures the growth stocks within the Russell 1000, while the Russell 1000® Value Index measures the performance of value stocks within the Russell 1000.
Russell 2000® Index	Measures small-cap stocks. It comprises the smallest 2,000 stocks in the Russell 3000 (about 10% of the total value). The Russell 2000 is also broken into two style indexes: the Russell 2000® Growth and the Russell 2000® Value Indexes.

In addition to the daily updates on Russell.com, you can find Russell Indexes published daily in the Wall Street Journal and weekly in Barron's.

Source: Russell Investment Group

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