Lipper Rating vs. Morningstar: An Overview

Most investors are not experts in mutual fund analysis. They are just looking for a relatively safe place to save their money and hope to earn a decent return along the way, and that’s why rating systems such as Morningstar (MORN) and Lipper Leaders are so important.

Morningstar and Lipper are two of the most prominent names in the 澳洲幸运5开奖号码历史查询:mutual fund world. These companies evaluate funds, highlight critical data, and award a simple, easy-to-compare rating to each of them. Mutual fund companies care about their Morningstar and Lipper ratings because they know so many 澳洲幸运5开奖号码历史查询:investors and 澳洲幸运5开奖号码历史查询:financial advisors rely on them to make investment decisions.

Morningstar’s most popular evaluation metric is its five-star scale. Lipper uses five separate 澳洲幸运5开奖号码历史查询:quintiles or categories, and rates each fund across five different measures. If a fund is determined to be in the top 20% in a specific quintile, it gets the title of “澳洲幸运5开奖号码历史查询:Lipper Leader” for that feature.

Morningstar and Lipper ratings are widely published, so many people accept them as accurate. A better approꦗach would be to understand the strengths꧂ and weaknesses of each rating system.

Morningstar

The first Morningstar Rating was introduced in 1985. It focused on a few br🍃oad categories and was more🙈 of a data accumulation resource than a comprehensive evaluation.

The entire system was overhauled in 2002. New fund categories were incorporated, and groups were narrowed to emphasize differences other than management styles. It included new metrics, and it broke performance history into different time periods. 澳洲幸运5开奖号码历史查询:Equity funds were segregated by 澳洲幸运5开奖号码历史查询:market capitalization (the size of the equities in the fund) to prevent large-cap funds from consistently dominating the ratings.

Today, 澳洲幸运5开奖号码历史查询:Morningstar organizes mutual funds based on the types of investments in a fund portfolio, the region where fund investments are made, and the overall management strategy. Morningstar Ratings are based on a 澳洲幸运5开奖号码历史查询:bell curve distribution:

• 10% receive a five-star rating
• 22.5% receive a four-star rating
• 35% receive a three-star rating
• 22.5% receive a two-star rating
• 10% receive a one-star rating 

Morningstar updates its rankings monthly.

Lipper

Lipper rates mutual funds according to five sets of criteria: consistency of return, 澳洲幸运5开奖号码历史查询:preservation of capital, 澳洲幸运5开奖号码历史查询:expense ratios, 澳洲幸运5开奖号码历史查询:total return, and 澳洲幸运5开奖号码历史查询:tax efficiency. Lipper lists all five ratings for any given mutual fund and lets investors decide which is most important to them.

Each category is assigned a rating on a scale of one to five. For example, a mutual fund could be rated a two when it comes to consistency of return and a five on tax efficiency. In the Lipper system, larger numbers are considered better; a mutual fund would rather be a four than a three.

Any fund listed in the top 20% for a given category receives the title of Lipper Leader for that category. The next 20% receive a rating of four, the middle 20% receive a rating of three, the next 20% are rated two, and the lowest 20% are rated one. It is possible for a mutual fund to have multiple Lipper Leader categories; in fact, many top funds have three or four Lipper Leader designations.

Lipper ratings are also adjusted every month and, just like Morningstar, are calculated for three-year, five-year, and 10-year periods. Lipper also throws in an overall period that dates back to a mutual fund’s inception.

Risk vs. Return

The core of a mutual fund rating system is built around risk-adjusted measures—how much potential for future losses an investor has to 💖assume in order to earn a return.

For both Morningstar and Lipper, the risk-adjusted measure is based on a comparison to the average performance for a given fund category. This means that a mutual fund will look good or bad based on how well its returns and losses correlate with basic indices for the category. For example, 澳洲幸运5开奖号码历史查询:large-cap funds are measured against a major large-cap index, such as the 澳洲幸运5开奖号码历史查询:S&P 500.

There’s a lot of potential for error in a system such as this, since merely being different from an index could lead to artificial improvements in fund rating. A 75% 澳洲幸运5开奖号码历史查询:midcap fund might be compared to a major midcap index, but its 25% exposure to 澳洲幸运5开奖号码历史查询:small caps could boost returns enough to give it a ratings boost, regardl♋ess of the performance of the manager.

This is particularly problematic for Lipper, which uses an 澳洲幸运5开奖号码历史查询:information ratio in its calculation that is overly sensitive to the choice of index. Morningstar suffers from this problem to a lesser extent. Investors should pay close attention to the level of difference between a mutual fund and its comparative index. 澳洲幸运5开奖号码历史查询:R-squared is an excellent gauge for those who follow 澳洲幸运5开奖号码历史查询:modern portfolio theory (MPT).

Special Considerations

Categories and index choices greatly influence the Lipper and Morningstar ratings, which means that it’s important to understand how ꩵfunds are assigned to different categories.

In the United States, Morningstar supports 122 categories, which map into nine category groups (U.S. equity, sector equity, allocation, international equity, alternative, commodities, 澳洲幸运5开奖号码历史查询:taxable bond, municipal bond, and 澳洲幸运5开奖号码历史查询:money market).

Lipper blends its mutual funds based on both classifications (which are holdings-based) and categories (which are based on the fund objective language in the prospectus). Lipper has separate global equity classifications based on 澳洲幸运5开奖号码历史查询:investment style and market capitalization.

Morningstar supports several different 澳洲幸运5开奖号码历史查询:diversified international stock categories, such as Foreign Large Value, Foreign Large Blend, Foreign Large Growth, Foreign Small/Mid Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, and World Stock, among others.

Even though there are significant methodological challenges with both Morningstar ꧅and Lipper, these are still viable and helpful tools for the investing public. Not everyone has the time ꦓto become an expert in fund analysis, so it is very desirable to have companies such as these to simplify things.

Investors should keep in mind that past performances—what these systems are based on—are not guarantees of future result�🐭�s, and every investment should match an individual investor’s specific needs and goals.

The Bottom Line

Morningstar and Lipper evaluate mutual funds, highlight critical data, and award a simple, easy-to-compare rating to each of them. Mutual fund companies care about their Morningstar and Lipper ratings because they know investors and financial advisors rely on them to make investment decisions.