Jargon Buster: Outperformance

The best way to define outperformance when it comes to investing is by way of an example.

In the investment world, a fund manager aims to outperform a specific benchmark that his or her fund’s performance will be measured against. In that way, a fund manager’s individual skills, flair and talent (active management) can be identified.

However, when it comes to choosing which fund to invest in, within a certain sector, it is also useful to be able to compare performance not only versus a benchmark, but also against peer funds. Hence outperformance of peers is also vital, because if all funds comfortably outperform the same benchmark but fund A gives you a 10% return and fund B gives you a 5% return, then obviously fund A would be a better fund to hold, assuming all other variables remain equal.

Let’s use the Stanlib Income Fund as an example. This fund falls into the domestic fixed interest income sector classification, and therefore competes with other funds within the same sector. The fund uses the BEASSA (Bond Exchange of SA) one- to three-year index as its benchmark.

For the past 12 months, up until the end of 2010, the fund returned 10,20% net of fees versus its benchmark return of 8,75%, so there was a comfortable outperformance of benchmark of 1,45%. Over the same time period, the fund’s quartile ranking was first, indicating that it performed in the top 25% of the funds in its sector, therefore outperforming the remaining 75% of its peers, who also use the same benchmark.