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Fund Spy

Morningstar Fund Spy

Keeping Up With the Joneses
Stock funds usually use an index as their benchmark, and it's getting harder and harder to find managers that will deviate substantially from their index's weightings. That's disappointing--if you want index-like performance, you can buy a real index fund that charges a lot less. But "closet indexers" aren't nearly as strange as a less-publicized group in the world of bond funds: "peer-trackers."

Much of the performance of bond funds comes from their interest-rate sensitivity, and that trait can be measured by a figure called its duration. Most bond-fund managers keep their fund's duration close to the duration of a benchmark. Curiously, for many of them that benchmark isn't an index, but the average of their peers' durations.

I can understand the managers' reasoning--often their performance is being measured against their peers' performance, not an index, and they don't want to fall behind in the race for bonuses or percentile rankings. And it's an easy way to avoid the type of fiasco that could cost someone his job. Sometimes the fund's directors might even mandate this approach.