Financial Quotient

What is 'outperform'?

WHAT DOES IT MEAN?

Seen in funds and stock market reports, the term "outperform" is used to indicate that a fund is expected to do better than a particular benchmark. For instance, fund ABC is said to outperform the S&P500 benchmark, if its return exceeds the S&P500 return.

In the case of a stock, analysts often use the term when upgrading a stock whose expected, or actual, return is better than the performance of similar stocks or the overall market. Though definitions vary, the term "outperform" is usually one rating above "market perform" or "neutral", and one rating below "buy".

WHY IS IT IMPORTANT?

When a stock is rated "outperform", it means the firm will do better than its industry average.

Alternatively, it also means that it is expected to do slightly better than the market return.

It is the opposite of the rating "underperform", which means a stock is expected to do slightly worse than the market return.

This is also known as "market underperform", "moderate sell" or "weak hold".

In general, an "underperform" rating is worse than neutral but better than "sell" or "strong sell".

When a fund manager consistently picks stocks that outperform the benchmark, the fund will produce higher rates of return.

If you want to use the term, just say: "My stockbroker expects healthcare stocks to outperform the market this year."

Lorna Tan

A version of this article appeared in the print edition of The Sunday Times on January 22, 2017, with the headline 'What is 'outperform'?'. Print Edition | Subscribe