Comparison Universe

What Is a Comparison Universe?

A comparison universe is a grouping of professionally managed investment portfolios or funds with similar mandates and objectives that serves as a benchmark for performance. That is, the performance of each managed portfolio or fund can be readily measured against the average for all members of the peer group.

Lipper and Morningstar are the companies that create the most-used comparison universes.

Understanding a Comparison Universe

Index Benchmark vs. Comparison Universe

The performance of a professionally-managed portfolio or fund can be evaluated in two ways:

Lipper Group and Morningstar

The Lipper Group, now owned by Thomson Reuters, was the first to create comparison universes as a means of comparing the relative performance of fund managers, in 1973. The manager of a fund that exceeds its peer universe has bragging rights to a performance that is "above the Lipper Group average."

Morningstar, Inc., the Chicago-based financial services company, produces its own comparison universe groups. They are not radically different but financial firms generally pick one or the other to use as a reference.

Both companies create separate universes for large-cap funds, small-cap funds, and everything in between. Moreover, the companies offer comparison universes for sectors, international funds, and assets other than stocks, such as investment-grade bonds.

They also track universes of blended funds that incorporate stocks, bonds, and other high-yield investments such as preferred stocks.

Pros and Cons of a Comparison Universe

Some critics consider both versions of comparison universes to be too broad to be effective gauges of fund performance. For example, a fund manager who handles a value stock fund might object to a direct comparison of the fund's performance with Morningstar’s large-cap comparison universe.

Another perceived drawback is that a comparison universe by nature might set an unrealistically high benchmark by either excluding poorly-performing managers who are no longer in business or by including those whose assets are merged with those of another manager. This latter issue is called survivorship bias.

The size of the fund or money management firm in terms of assets under management is another consideration in creating a relevant comparison universe. The best money managers generally figure in the top quartile of their comparison universes on a consistent basis, not just for a few quarters or a few years.

The benefit of a comparison universe is that it offers another type of benchmark entirely. A portfolio that consistently beats its index benchmark but regularly falls short of its comparison universe is demonstrating a problem: Either it’s in the wrong comparison universe or its benchmark is too easy to beat. That could be because the fund routinely takes on more relative risks than are reflected in the index.