Peer Group Comparison: The What, The How, The Why Now?

Published by Kate Baird, General Manager, Service Bureau
August 24th, 2018

 

              Should I take the toll-way or the highway?

              Should I cook with olive oil or butter?

              Should I strap my lawn chair to 45 weather balloons to fulfill my dream of flying? (Search: Lawn Chair Larry)

             Should I continue to invest with Wiley Coyote Trust or should I switch to Acme Investments?

We weigh the perceived benefits and the results of our decisions constantly. If we don’t make judgments well, we may be removed from the gene pool. Happily, a majority of the time our decisions don’t carry such dire consequences. Some studies purport that all our decisions are emotional and the data we gather support the decision even if we gather the data first. As we approach the field of artificial intelligence, I find that conclusion fascinating. It’s an unavoidable fact that humans are wired to relate and compare everything, so it’s no wonder that there are a myriad of data points to use when evaluating your portfolio.

You might compare the growth in value for the portfolio to the goal of the portfolio to see if you’re on track. You might also compare the performance of the portfolio to the benchmark that was designed for the portfolio’s investment strategy. If you’ve hired active management, you might expect the portfolio to beat the benchmark more often than not. If your friends and colleges are investors, you might also make comparisons to each other. I wouldn’t be a responsible performance person if I didn’t state that there are potential problems with comparing to your peers, especially if that information goes into how you evaluate an advisor. You may not have the same risk profile, time period, or investment strategy – so beware.

Plan Sponsors evaluate their investment portfolios in many of the same ways mentioned above. However, they have an additional option of a more formalized peer comparison through the Wilshire TUCS Universe service offered by First Rate.

Leading custodians blind submit their client’s performance data into TUCS to create the universes of data. First Rate’s subscribing clients can have the plan sponsor performance submitted to the universe and receive reports that show their relative rankings amongst their peer group. There is a subtle—but important—difference in comparing the plan sponsor to their peers, and that is: “The Wilshire 5000 serves as a benchmark of US equity securities that managers can invest in, whereas a TUCS universe of US equity portfolios is a benchmark of US equity securities that managers have invested in.” –Wilshire.

Dan Sperber, a cognitive scientist at Central European University and Mercier’s co-author, says that the social implications of any decision are far from irrelevant. “Even if a decision seems to bring a benefit if it is ill-judged by others, then there’s a cost,” he says. “The main role of reasoning in decision-making is not to arrive at the decision but to be able to present the decision as something that’s rational.”

              What data does your GPS software provide about your route selection?

              What nutritional data are you using to influence your choice of cooking fats?

             What are the data points telling you about your advisor and your investment performance?

In the end, you will gather the information you need to have your emotional decision appear rational. In an uncertain world where the future is rarely ever exactly like the past, that actually isn’t a bad thing.

About the Author: Kate Baird, General Manager of Service Bureau, has been with First Rate since 1994. Baird is responsible for developing the business-process-as-service for First Rate's full service clients. 

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