Lipper Ratings Explained For Your Unit Trust Fund
If you read Personal Money Magazine or Smart Investor then you would have noticed that unit trust funds performance are given ratings. The two most prominent players in giving the ratings are Lipper and Morningstar.
Today I will try to explained the ratings by Lipper and what they mean. Now before that lets look a bit of background on Lipper as a company.
Lipper is a Thomson Reuters company, which is a global leader in supplying mutual fund information, analytical tools, and commentary. It's benchmarking and classifications are widely recognized as the industry standard by asset managers, fund companies and financial intermediaries.
Founded in 1973, it has offices in Asia, Europe and the United States.
Now lets look at how they give ratings to the funds. The ratings are called "Lipper Leaders Rating System".
The rating system is categorised in 5 categories which are:
Funds are rated on a numeric scale of 5 to 1, with ‘5’ representing funds with the highest rating or Lipper Leaders, and ‘1’ representing the lowest rated funds.
The highest 20% of funds in each peer group are named Lipper Leaders are rated 5, the next 20% receive a rating of 4, the middle 20% are rated 3, the next 20% are rated 2, and the lowest 20% are rated 1.
While Lipper Leader Ratings are not predictive of future performance, they do provide context and perspective for making knowledgeable fund investment decisions.
The ratings are subject to change every month and are calculated for the following periods: three-year, five-year, ten-year, and overall. The overall calculation is based on an equal-weighted average of percentile ranks for each metric over three-, five-, and ten-year periods (if applicable).
The 5 categories explained:
1. Total Return
The Lipper Rating for Total Return denotes a fund that has provided superior total returns (income from dividends and interest as well as capital appreciation) when compared to a group of similar funds.
The Lipper Rating for Total Return may be the best fit for investors who want the best historical return, without looking at risk. This measure alone may not be suitable for investors who want to avoid downside risk. For more risk-averse investors, the Total Return ratings can be used with Preservation and/or Consistent Return ratings to make an appropriate selection that balances the risk and return.
2. Consistent Return
The Lipper Rating for Consistent Return identifies a fund that has provided relatively superior consistency and risk-adjusted returns when compared to a group of similar funds. Funds which achieve high ratings for Consistent Return may be the best fit for investors who value a fund's year-to-year consistency relative to other funds in a particular peer group.
Investors are cautioned that some peer groups are inherently more volatile than others, and even Lipper Leaders for Consistent Return in the most volatile groups may not be well suited to shorter-term goals or less risk-tolerant investors.
3. Preservation
The Lipper Rating for Preservation is a fund that has demonstrates a superior ability to preserve capital in a variety of markets when compared with other funds in its asset class.
Choosing a Lipper Rating for Preservation may help to minimize downside risk relative to other fund choices in the same asset class. Investors are cautioned that equity funds have historically been more volatile than mixed-equity or fixed-income funds, and that even the Lipper Rating for Preservation in more volatile asset classes may not be well suited to shorter-term goals or less risk-tolerant investors.
4. Expense
The Lipper Rating for Expense identifies a fund that has successfully managed to keep its expenses low relative to its peers and within its load structure.
The Lipper Rating for Expense may be the best fit for investors who want to minimize their total costs. It can be used in conjunction with Total Return or Consistent Return to identify funds with above-average performance and lower-than-average cost.
5. Tax Efficiency (US Only)
The Lipper Ratings for Tax Efficiency identifies a fund that has been successful at deferring taxes over the measurement period relative to similar funds.
The Lipper Ratings for Tax Efficiency may be the best fit for tax-conscious investors who hold investments that are not in a defined-benefit or retirement plan account. Investors in high federal tax brackets are more likely than those in lower tax brackets to see more benefit from tax-efficient funds.
So now you know, lets Go Out and Play!
Today I will try to explained the ratings by Lipper and what they mean. Now before that lets look a bit of background on Lipper as a company.
Lipper is a Thomson Reuters company, which is a global leader in supplying mutual fund information, analytical tools, and commentary. It's benchmarking and classifications are widely recognized as the industry standard by asset managers, fund companies and financial intermediaries.
Founded in 1973, it has offices in Asia, Europe and the United States.
Now lets look at how they give ratings to the funds. The ratings are called "Lipper Leaders Rating System".
The rating system is categorised in 5 categories which are:
- Total Return
- Consistent Return
- Preservation
- Tax Efficiency (US Only)
- Expense
Funds are rated on a numeric scale of 5 to 1, with ‘5’ representing funds with the highest rating or Lipper Leaders, and ‘1’ representing the lowest rated funds.
The highest 20% of funds in each peer group are named Lipper Leaders are rated 5, the next 20% receive a rating of 4, the middle 20% are rated 3, the next 20% are rated 2, and the lowest 20% are rated 1.
While Lipper Leader Ratings are not predictive of future performance, they do provide context and perspective for making knowledgeable fund investment decisions.
The ratings are subject to change every month and are calculated for the following periods: three-year, five-year, ten-year, and overall. The overall calculation is based on an equal-weighted average of percentile ranks for each metric over three-, five-, and ten-year periods (if applicable).
The 5 categories explained:
1. Total Return
The Lipper Rating for Total Return denotes a fund that has provided superior total returns (income from dividends and interest as well as capital appreciation) when compared to a group of similar funds.
The Lipper Rating for Total Return may be the best fit for investors who want the best historical return, without looking at risk. This measure alone may not be suitable for investors who want to avoid downside risk. For more risk-averse investors, the Total Return ratings can be used with Preservation and/or Consistent Return ratings to make an appropriate selection that balances the risk and return.
2. Consistent Return
The Lipper Rating for Consistent Return identifies a fund that has provided relatively superior consistency and risk-adjusted returns when compared to a group of similar funds. Funds which achieve high ratings for Consistent Return may be the best fit for investors who value a fund's year-to-year consistency relative to other funds in a particular peer group.
Investors are cautioned that some peer groups are inherently more volatile than others, and even Lipper Leaders for Consistent Return in the most volatile groups may not be well suited to shorter-term goals or less risk-tolerant investors.
3. Preservation
The Lipper Rating for Preservation is a fund that has demonstrates a superior ability to preserve capital in a variety of markets when compared with other funds in its asset class.
Choosing a Lipper Rating for Preservation may help to minimize downside risk relative to other fund choices in the same asset class. Investors are cautioned that equity funds have historically been more volatile than mixed-equity or fixed-income funds, and that even the Lipper Rating for Preservation in more volatile asset classes may not be well suited to shorter-term goals or less risk-tolerant investors.
4. Expense
The Lipper Rating for Expense identifies a fund that has successfully managed to keep its expenses low relative to its peers and within its load structure.
The Lipper Rating for Expense may be the best fit for investors who want to minimize their total costs. It can be used in conjunction with Total Return or Consistent Return to identify funds with above-average performance and lower-than-average cost.
5. Tax Efficiency (US Only)
The Lipper Ratings for Tax Efficiency identifies a fund that has been successful at deferring taxes over the measurement period relative to similar funds.
The Lipper Ratings for Tax Efficiency may be the best fit for tax-conscious investors who hold investments that are not in a defined-benefit or retirement plan account. Investors in high federal tax brackets are more likely than those in lower tax brackets to see more benefit from tax-efficient funds.
So now you know, lets Go Out and Play!
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