Comparison Universe

A comparison universe is a comprehensive grouping of investment managers with similar mandates and investment objectives. It serves as a peer benchmark to measure a money manager's performance.

A comparison universe should not be confused with a fund’s index benchmark, which is a basket of investments that an active manager attempts to beat over a given period, often every year.

A comparison universe typically is compiled by one of two major companies: Lipper or Morningstar. Each has slightly different comparison-universe groupings.

Lipper, now owned by Thomson Reuters, got its start in 1973 and still provides comparison universes to mutual fund companies. A large number of mutual funds since have moved to Morningstar averages, a Chicago-based publicly traded company that started in 1984.

Each company creates universes for large-cap managers, small-cap managers and everything in between. Moreover, the companies offer comparison universes for sector managers, international managers, and ones who invest in assets classes other than stocks, such as investment-grade bonds. In addition, there are universes for blended funds that incorporate stocks, bonds and even high-yield investments, the latter being bonds that behave more like stocks.

One criticism of using a comparison universe to measure how well a manager is doing is that the defined parameters sometimes are too broad to be an effective gauge of performance. For example, comparing a special situations manager who tends to like value companies with Morningstar’s broad large-cap comparison universe might not be a proper comparison.

Another drawback is that comparison universe sometimes set unrealistically high benchmarks by either excluding poorly-performing managers who are no longer in business, or including ones 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 universe on a consistent basis, not just for a period of a few quarters or a few years.

What is good about a comparison universe, however is that it offers another type of benchmark entirely. An investment that consistently beats its index benchmark but regularly falls short of its comparison universe points to a problem: Either it’s not in the right comparison universe, or it its benchmark is too easy for the fund to beat, perhaps because the fund routinely takes on more relative risk than the index.