Peer group comparisons imperfect tool

The problem with peer group comparisons is that they often don’t compare like with like, according to Russell Investments director of fiduciary research Scott Donald.

“It is about how reliable are the organisations you are including in the comparisons,” he told a Russell investment conference in Melbourne.

“There are differences in the way fund performance is calculated, for example, so it is hard to see what the objectives of a comparison will be.”

Donald said there were also issues about how the comparison data had been compiled historically as it may include organisations that had ceased operating.

“Survivorship bias is really important as it affects the performance of today’s participants,” he said.

“Funds disappear because they underperform so if they are still included in the data, the surviving funds are biased upwards.”

Another danger is using ‘median’ managers as the basis for the comparison.

Donald said what is defined as a ‘median’ manager may in fact not exist in a particular data set, so those doing the comparison end up creating a middle point that could be inaccurate.

“This ends up with the comparison creating a median that is not replicable elsewhere,” he said.

“Most investment comparisons are a mismatch between what you want to compare and the actual investment.”

Another problem is the observation delay as research can be up to six months out of date.

“So the comparisons are based on investment trends of six months ago and the truth about what has happened only comes out later,” Donald said.

The use of peer comparisons also raises some questions.

He said if you ignore this form of peer comparison in decision-making, you risk regrets.

“If you do include this comparison, define your peer group carefully and research the input data,” he said.

“You have also got to perform the same analysis each time you decide to undertake peer comparisons.”