What is Lipper leader, and how does its system rank mutual funds?

There are mutual fund rating systems, and one of those includes the Lipper leader. It is a ranking system based on funds’ success and whether they met specific goals or not. Lipper’s benchmarking and classifications are considered by many financial professionals up to standard. It helps an investor to match funds with their preferences and investment goals. The owner of this system is Refinitiv. It is a market analytics and data provider company co-owned by Thomas Reuters.

What is the Lipper Leader?

Lipper leaders is a ranking system from Lipper Analytical Services. Investors and financial professional gains access market data and mutual fund ratings. It also made comparison universes series and other fund analytics. Thomson Reuters acquired this, and the current owner is Refinitiv. Thanks to this, people can access financial technology and information about 4,000 institutions across 190 countries. Aside from Lipper leader, which is a sought-after ranking system, we also have the Morningstar.

Lipper leader system rates mutual funds that financial professionals use. And when we say financial professionals, they include asset managers, financial intermediaries, fund companies, and investors. It helps in deciding which among the funds can meet one’s investment goals. This is possible through fund ranking, which is complimentary.

The metrics

Lipper leader uses five metrics when they rank mutual funds, and they are:

• Total return (Actual rate of return from a given time frame)
• Consistent return
• Capital preservation
• Tax efficiency.
• Expenses (Sales loads, Fees)

The total return is what people usually cite and monitor. It considers dividends and price appreciation. The split fund ranking for every category is always by quintiles. Lipper updates these rankings monthly. Here is how the ranking goes:

1. Lipper Leaders (Top 20%). 
2. Four-star equivalent (Lipper, next 20%)
3. Three-star equivalent (next 20%)

Every fund is compared to another peer for every category. The top 20% per category have the highest ratings, and we call them Lipper leader. For every category’s three-year, five-year, 10- year period, and overall, the company names leaders.

We thought you should know.

Although Lipper leader seems impressive, it can only do so much. It cannot predict future results base using past performances. Also, it cannot identify up-and-coming funds with fewer track records that may outperform in the long run. Here is the thing: Lipper leaders cannot predict future performance, but past performance impacts the system.

You should know that there is no risk-adjusted return in the Lipper leader category. What is a risk-adjusted return? It refers to the return relative to every unit of risk that the fund manager took on. If the customers want to approximate this measure, they should combine consistent return rankings and total return with capital preservation.

Let us summarize

Lipper leader is a ranking system based on mutual funds and if they met their goals or not. It depends on total return, capital preservation, consistent return, tax efficiency, and expenses. Funds are subjected to comparison. There are leaders hailed for three-year, five-year, and 10-year periods per category. Financial professionals say that the system is up to standard.