Lipper Ratings

Lipper ratings, sold under the name Lipper Leaders, are scores that the fund-data firm LSEG Lipper gives to investment funds to show how they compare with similar funds. Each fund is ranked within its peer group on several separate measures, such as total return and expenses, and receives a score from 5 (best) to 1 (worst) on each one. A fund in the top fifth of its group on a measure is called a Lipper Leader for that measure.

The ratings are used by fund companies in marketing, by financial advisers and fund platforms to screen funds, and by journalists. They are one of the two most widely cited fund rating systems, the other being the Morningstar Rating. Like Morningstar's star rating, Lipper Leaders are based entirely on past data and do not predict future results; any use of them in US fund advertising is subject to SEC and FINRA rules on performance rankings.

Think of a school report that grades a pupil separately in maths, reading, attendance and behaviour, each time comparing them only with classmates of the same age. A pupil can be top of the class for attendance and middling at maths. Nobody is compared with pupils from a different year.

Lipper does the same for funds. A fund that buys large American companies is graded only against other funds that do the same, and it gets a separate grade for how much it earned, how steady it was, how well it avoided losses and how cheap it is to own. Investors can then look at the grade that matters most to them.

• Total Return. The fund's total return, with dividends and other distributions reinvested and after fund expenses, compared with peers. It ignores risk.
• Consistent Return. Return adjusted for how steadily it was earned, rewarding funds that delivered strong risk-adjusted results with relatively smooth performance rather than a few big jumps. The LSEG Lipper Fund Awards are based on this measure.
• Preservation. How well the fund avoided losses, measured from its negative monthly returns and compared with all funds in the same broad asset class (for example equity, mixed-asset or fixed income), not just its narrow peer group. Equity funds therefore rarely score highly against bond funds.
• Expense. How low the fund's expense ratio is compared with peers that have a similar sales-load structure.
• Tax Efficiency. Used only for US funds, it measures how much return investors kept after federal taxes on distributions, such as capital gains distributions.

Funds are first placed in a Lipper classification, a peer group defined by what the fund invests in and how, for example US large-cap growth funds or global high-yield bond funds. Each fund is ranked by percentile within its group on each measure. The top 20% receive a score of 5, the next 20% a 4, the middle 20% a 3, the next 20% a 2 and the bottom 20% a 1, so every score covers the same share of funds.

Scores are produced for three-, five- and ten-year periods where the fund has enough history, and an overall score combines the available periods with equal weight. The ratings are recalculated monthly. Because the system is purely relative, a fund can be a Lipper Leader in a year when it lost money, if its peers lost more.

A. Michael Lipper, a securities analyst, founded Lipper Analytical Services in 1973 to supply performance data to US mutual fund companies. Reuters bought the firm in 1998. Lipper became part of Thomson Reuters in 2008, moved with Thomson Reuters' financial and risk business into Refinitiv in 2018, and passed to the London Stock Exchange Group when LSEG completed its purchase of Refinitiv in January 2021. It now operates as LSEG Lipper, with fund data covering more than 400,000 share classes in over 80 countries, according to LSEG. Lipper also publishes peer-group averages and Lipper indices that fund companies use as a benchmark in a prospectus or annual report.

Advisers often use Lipper scores as a first screen, for example to shortlist funds that score 4 or 5 on Consistent Return and Expense. Separate measures make trade-offs visible: a fund may lead on Total Return but score poorly on Preservation because it carries more volatility and market risk.

The limitations are those of any backward-looking peer ranking. Strong past results often fail to persist. Funds that closed or merged drop out of the data, a form of survivorship bias. Results depend on which classification a fund is put in, and different share classes of the same fund can receive different scores because their fees differ. In the US, FINRA Rule 2210 sets conditions for quoting rankings in retail communications, including naming the ranking entity, the category and the period. A rating is best treated as one input into decisions about portfolio allocation, alongside an investor's investment objective and costs.

• Lipper fund data — LSEG