In the U.S. investment research firms have developed a host of domestic style indexes for investors to more accurately assess the performance of their U.S. equity mutual funds. Investment research firms construct the style indexes by assigning all of the publicly traded companies domiciled in the U.S. into specific style categories based on their identified investment style characteristics and market capitalization. By organizing companies in this manner, it is possible to construct a host of meaningful benchmark proxies that can be used by investors in order to more accurately evaluate the performance of their mutual funds.

As one can imagine, the organization of publicly traded companies by investment style and market capitalization is a complex undertaking. Therefore, it is important for investors to have an understanding of the criteria used to construct the style indexes before using them to make any performance assessments of their mutual funds. Here’s how two of the most well-known investment research firms construct their benchmarks, and a five-step process to help ensure that you are making an accurate performance assessment.

Three Types of Investment Style Categories

There are three types of equity mutual fund style categories. The first style category is referred to as value because it represents a style orientation of companies that are trading at a discount in relation to their anticipated intrinsic value. Value companies are typically found in depressed industries and in industries that are out-of-favor, and typically exhibit a low price-to-earnings ratio and a low price-to-book value ratio.

The second style category is growth and it typically consists of companies that are expected to have high future earnings growth. Companies assigned to the growth category usually trade at a premium and typically exhibit a high price-to-earnings ratio, a high price-to-book value ratio and a high price-to-sales ratio.

The third style category is core, and it’s made up of companies that have a blend of both value and growth characteristics. (For more on ratios, refer to our in-depth Financial Ratio Tutorial .)

Russell Investments and MSCI Barra Style Classification Systems

Two of the most widely known investment research firms are Russell Investments and MSCI Barra. Russell Investments began creating benchmark indexes since 1984 in order for investors to have more valid benchmark proxies. In the global arena, MSCI Barra has been constructing equity indexes for more than 25 years, and recently developed a host of U.S. equity style indexes in order to foster investment performance evaluation.

For the purposes of constructing style indexes, both Russell Investments and MSCI Barra have developed comprehensive guidelines for defining eligible corporate securities and membership by market capitalization, and determining investment style. Based on the criteria listed in the table below, Russell Investments and MSCI Barra assign more than 8,700 publicly traded U.S. companies to style categories in order to build benchmark proxies. Once these benchmarks are constructed, they are used by investors to gauge the performance of their investment options.