What Is a Lipper Leader?
The term Lipper Leader refers to a mutual fund rating system. The system ranks the success of funds based on whether they meet a specific set of goals. Financial professionals recognize Lipper's benchmarking and classifications as an industry-standard. It's a great tool for investors to use to match funds with their preferences so they can meet their investment goals. The system is owned by market analytics and data provider Refinitiv, a company that is partly owned by Thomson Reuters (TRI).
- Lipper Leader is a rating system that ranks success based on whether mutual funds meet a specific set of goals.
- The Lipper Leader system ranks funds based on total return, consistent return, capital preservation, tax efficiency, and expenses.
- Funds are compared to their peers, with leaders named for three-, five-, and 10-year periods in each category.
- The system is considered an industry standard for financial professionals.
- Investors can use the system to choose funds that help meet their financial goals.
How the Lipper Leader Works
The Lipper Leader rating system was developed by Lipper Analytical Services, which was established in 1973. It provides investors and financial professionals with market data and mutual fund ratings.
The company, which also created a series of comparison universes and other fund analytics, was acquired by Thomson Reuters and is now owned by Refinitiv. This company offers financial technology and information to more than 40,000 different institutions in about 190 countries. Lipper Leader is among the industry's top-ranking systems along with those from rival Morningstar.
As mentioned above, the Lipper Leader system is a tool used to rate mutual funds by financial professionals, such as asset managers, fund companies, and financial intermediaries, as well as investors. The system's ratings help investors decide which funds meet their investment goals by ranking funds that complement one another. For example, a fund ranked a Lipper Leader for both tax efficiency and total expenses likely is among the lowest-cost options.
Lipper ranks mutual funds based on five metrics:
- Total return or the actual rate of return over a specific period of time
- Consistent return
- Capital preservation, which is a means by which investors can prevent loss
- Tax efficiency
- Expenses such as sales loads, redemption fees, account fees, management fees, and others
Of all the Lipper Leader categories, the most widely cited and watched is total return, which takes into account both dividends and price appreciation. All categories split fund rankings by quintiles. The top 20% are the Lipper Leaders, Lipper ranks the next 20% with the equivalent of four-stars, the next 20% a three-star equivalent, and so on. Lipper updates its ratings once a month.
Each fund is compared to its peers for each category. The top 20% of funds in each category receive the highest ratings and are named Lipper Leaders. The company names leaders for three-, five-, and 10-year periods for each category, as well as overall.
Investors with substantial assets outside a 401(k) or similar tax-advantaged retirement account may also use Lipper Leaders for tax efficiency.
Like other rating systems, the Lipper Leader system can only go so far. For instance, investors cannot use it to predict future results based on past performance. Moreover, the Lipper Leader system cannot identify up-and-coming funds with shorter track records that may outperform over time.
Although past performance factors into the Lipper Leader system, don't expect it to predict future performance.
Another important point to note is that there is no Lipper Leader category for risk-adjusted return. This is the return relative to each unit of risk taken on by the fund manager. Customers must combine total return with capital preservation and consistent return rankings to even attempt to approximate this measure.
For some investors, the less-popular Lipper Leaders are of particular interest, depending on their investment style. Take Lipper Leaders for consistent return, for example. This ranking points to funds that did a better job compared to peers that avoided volatile swings. While this metric doesn’t help short-term investors or those that are more risk-averse, it’s useful to long-term investors who want to avoid funds that put up big performance numbers over a specific short-term period, rather than repeatedly over time.