What it means
Lipper is a fund research and data business, now part of a larger financial data group. It sorts thousands of funds into classifications, such as large-company growth funds or short-term bond funds, and then builds indexes to measure how the funds in each group perform.
The key idea is that a fair comparison needs like-for-like peers. Comparing a technology fund with a government bond fund tells you little, while comparing it with an index of other technology funds shows whether the manager has added value.
A Lipper Index gives that peer yardstick for each classification. Unlike a stock index, which tracks the prices of shares, a Lipper Index tracks the returns of funds.
The indexes are typically built from a sample of the largest funds in a classification and are updated regularly, so they reflect what investors in that category have actually earned after fund fees. Finance and treasury teams use the indexes when reviewing the performance of funds they hold, for example in a company pension plan or an employee savings scheme.
They also appear in fund factsheets and marketing material, where a fund will say how it ranks against its Lipper peer group. As with any benchmark, there are caveats.
A fund may be placed in a classification that does not quite match its style, past performance does not guarantee future results, and a fund that beats its index in one period may lag it in the next. A comparison is a starting point for questions, not a final verdict, and it should always be read alongside the fund's costs and risk.
In practice
Real-world examples.
Example
A company trustee reviews the pension plan's equity fund each year. She compares it with the matching Lipper Index and finds it has lagged the peer group for three years, which prompts a manager review. The committee asks the manager to explain the shortfall before deciding whether to replace the fund.
Example
A financial adviser uses Lipper Indexes to explain to a client that a 5% return in a year of falling bond markets was good relative to peer bond funds. Peers had averaged a small loss, so the client could see that the result reflected skill and not just a favourable market. The adviser also shows the same comparison over five years to confirm the result is not a one-off.
Example
A fund marketing team includes the fund's performance against its Lipper Index in its monthly factsheet. Compliance checks that the same time periods and fees are used for the fund and the index. The team also adds a note explaining how the classification was chosen.
Formula
Calculation
Excess return = fund return - index return.
Suppose a large-company growth fund returned 8.4% over a year, while the matching Lipper Index returned 7.1%. Excess return = 8.4% - 7.1% = 1.3 percentage points. On a $200,000 investment, the fund earned 200,000 x 0.084 = $16,800, while the index would have earned 200,000 x 0.071 = $14,200, so the fund added 16,800 - 14,200 = $2,600.Case study
Seen in the real world.
Redfern Capital Partners is an illustrative, fictional investment firm that runs a mid-sized growth fund. After a year in which the fund returned 6% while markets generally rose, investors complained that the result was disappointing.
The firm compared the fund with the matching Lipper Index for its category and found that peer funds had averaged 5% over the same year. The fund had in fact beaten its peers by one percentage point, though it still delivered less than the broad market.
In this illustrative case the firm used the comparison to explain that the fund's style had been out of favour. It also showed investors a three-year chart of the fund against the peer index to give the one-year result proper context. The complaints stopped once investors saw that the fund had led its peers in two of the three years.
Watch out
Common mistakes.
- Comparing a fund with the wrong index, which gives a misleading picture of the manager's skill.
- Judging a fund on a single year, when peer comparisons need several years to reduce the effect of luck and style cycles.
- Ignoring fees, even though fund returns are measured after costs while a pure market index is not.
Questions
People also ask.
What do Lipper Indexes measure?
They measure the returns of funds within a classification, giving a peer benchmark for similar funds.
Are Lipper Indexes the same as the S&P 500?
No, the S&P 500 tracks the prices of 500 large US companies, while a Lipper Index tracks the returns of funds that invest in assets such as shares or bonds.
Can I invest directly in a Lipper Index?
No, an index is a measurement tool and cannot be bought, although index funds and exchange-traded funds exist that track other well-known indexes.
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