For fund benchmarks, two or none is better than one

By James Langton | September 19, 2022 | Last updated on September 19, 2022
2 min read
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Benchmarks matter to mutual fund investors.

So finds research from the Office of the Investor Advocate (OIAD) at the U.S. Securities and Exchange Commission (SEC), which examined the impact of performance benchmarks on investor decision-making.

The study found that funds shown underperforming a single benchmark were viewed as much less attractive, with investors allocating fewer dollars to these funds.

When investors were shown a fund that underperformed one benchmark but outperformed another over the same period, they also viewed the fund less positively — although the effect wasn’t as large as when the fund was shown underperforming a single benchmark.

However, seeing a fund outperforming a benchmark had little effect on investors’ view of the fund’s appeal or their hypothetical allocation decisions, researchers found. They also found that investors were indifferent to broad or narrow benchmarks. Using text to clarify benchmarks didn’t affect investors either.

One of the more unexpected findings was that more experienced investors had a greater response to the use of benchmarks.

“Surprisingly, participants with higher investment sophistication appear to react most strongly to benchmarks,” the researchers found, noting that thus finding runs counter to most economic models and “much of regulatory theory.”

The study also found meaningful variation in the performance of benchmarks within a given sector. Funds also took different approaches to using a secondary benchmark in their performance reporting.

“Ultimately, these patterns raise the possibility that funds can pick benchmarks that satisfy the requirements for permissible benchmarks, but are relatively poor performing as compared to other permissible benchmarks,” the study said, noting that the cherry-picking of benchmarks may mislead investors.

Finally, the researchers concluded that investors may be better off with either two or no benchmarks being used in funds’ performance reporting.

“Using an economic model, we ask what type of benchmark presentation gets investors closest to their optimal allocation, finding that conditions with no benchmark and with two benchmarks minimize distortions,” it said.

The research study was commissioned and filed in response to proposed SEC reforms that aim to modernize fund shareholder reports, the OIAD noted.

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.