Relative Return

Relative return is the return an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the asset’s return and the return of the benchmark. Relative return can also be known as alpha.

Relative return is most often used when reviewing the performance of a mutual fund manager. Investors can use relative return to understand how their investments are performing relative to various market benchmarks.

Similar to alpha, relative return is the difference between investment return and the return of a benchmark. There are some factors an investor must consider when using relative return.

Transaction costs and standard versus total return calculations can affect relative return observations. Transaction fees can be a significant factor for investors dealing with high cost intermediaries. Transaction fees often detract from a fund’s performance. Using standard versus total return can also be a factor since standard return may not include distributions and total return does.

Transaction Costs

Transaction costs can significantly impact a fund’s relative return. For example, the Oppenheimer Global Opportunities Fund is a top performing actively managed fund. As of September 30, 2017, its one year return significantly outperformed the MSCI All Country World Index. The Fund provides performance returns with and without sales charges which exemplify the effects transaction costs can have on relative return. For the one year period through September 30, 2017, the Fund’s Class A shares had a return of 30.48% without sales charges. With sales charges the one year return was 22.97%. With and without sales charges the Fund outperformed the benchmark’s one year return of 18.65%. To mitigate transaction costs and increase relative return an investor could potentially buy shares of the Fund through a discount brokerage platform.

Total Return

To help increase the relative return comparison, an investor can also use total return which considers distributions from the fund in its return calculations. Some standard return calculations do not include distributions and can therefore decrease the relative return.

Fund Fees

Fund fees are another factor that can influence relative return. Fund fees are unavoidable and must be paid collectively by fund shareholders annually. Investment companies account for these fees as liabilities in their net asset value calculations. Therefore, they impact the fund’s net asset value (NAV) for which return is calculated.

Passive mutual funds exemplify this in their returns. Investors can expect the relative return of a passive mutual fund to be slightly lower than the benchmark return due to operational expenses.