Lipper, a subsidiary of the international business and news conglomerate Thomson Reuters, provides data and analysis on investment products. Investors use the Lipper ranking scale to compare stocks, mutual funds and other equities and analyze their performance over time. The organization has been in business since 1973, offering a number of tools for financial advisors, banks, brokers and private investors looking to diversify their portfolios.
The Lipper ranking system allows investors and financial advisors to compare funds based on specific criteria, such as their total return and tax efficiency. Any fund that receives a "5" rating is designated as a Lipper Leader.
Lipper Ranking System Overview
The Lipper ranking system offers investor-centered tools to assist in selecting mutual funds that suit your goals and risk tolerance. In the U.S., the organization ranks funds against similar funds in five categories: total return, consistent return, preservation, expense and tax efficiency. Scores are subject to change every month and are calculated for three-year, five-year, 10-year and overall time frames, explains Lipper Leaders.
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The highest 20 percent of funds in each peer group category are named Lipper Leaders and get a "5" ranking. The next 20 percent are given a rating of "4," the middle 20 percent receive a "3" rating and the next 20 percent get a "2" rating. The lowest 20 percent are assigned a "1" rating. Therefore, each fund receives five scores in each of the categories above. These ratings are compared across different types of funds, such as bond funds and mutual funds, which allows investors to get a clear view of the best-performing equities.
The funds are also assigned codes based on their characteristics. For example, ABR (Absolute-Return Funds) funds seek to provide good returns even when the economy is in bad shape. NR (National Resource) funds invest in gas, oil and other natural resources stocks, notes the Center for Research in Security Practices. There are also Adjustable Rate Mortgage (ARM) funds, Balanced (B) funds, Large-Cap Value (LCVE) funds and more.
The total return ranking reflects a mutual fund's historical total return performance compared with the total return of its peers. As an investor, you can use the total return ratings in conjunction with preservation and consistent return ratings to make an appropriate selection that balances your risk tolerance.
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Lipper Fund Performance Explained
As discussed above, the Lipper ranking system ranks funds based on five criteria. A mutual fund ranked highly in "consistent return" is one that shows superior consistency and risk-adjusted returns when compared to a group of similar funds. A high consistent-return score in a mutual fund is attractive to investors who value a fund's year-to-year consistency. Some peer groups analyzed by Lipper, such as emerging market mutual funds, are inherently more volatile than others. So, a high consistent-return score in a volatile group may not be suitable for less risk-tolerant investors.
Lipper's funds ranking high in tax efficiency are those that most successfully postpone taxes. The holdings in these funds tend to have a low turnover rate. A high score in this category makes this fund more attractive to tax-conscious investors and those in high federal income tax brackets.
Mutual funds with a high Lipper preservation score have demonstrated an ability to preserve capital in a variety of markets when compared with similar funds. Lipper cautions that equity funds historically have been more volatile than combination equity-income funds or fixed-income funds.
Last but not least, a fund with low expenses relative to its peers will get a higher Lipper ranking in this category. Investors interested in minimizing their total costs will find funds that score high in this category a real positive. A fund's score in this category might be used with the total return and consistent return categories to choose funds with lower-than-average fees and above-average performance.
As an investor, you may use these scores to compare two or more funds and make an informed decision. However, note that different classification criteria may apply to the funds issued in Europe, Asia, Canada and other regions. If you're ready to give it a try, go to Lip Leaders and narrow down your options by time period, total return, preservation and other factors.
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