Lipper hands fund investors a better aid to finding winners; DOLLARS & SENSE


THERE were more top-performing funds last quarter than usual. It's not that performance necessarily was better, it's that one of the major ways for tracking performance has changed.

Lipper Inc. has changed the way it categorizes funds, a move designed to provide investors with more accurate data on what a fund really does and how it stacks up against competitors. Better and improved data is terrific, but it won't come without some short-term confusion, particularly when it comes to what investors see in the paper and in ads touting performance. The whole situation is a bit confusing.

Lipper measures pure performance, ranking funds strictly on the basis of returns. Until last month, Lipper put stock funds into eight categories.

Now, that number is 15.

At the crux of the new system is a grid similar to a Morningstar style box. That box is like a tic-tac-toe board, showing whether a fund buys large, medium or small stocks, and whether it uses a growth, value or blended investment style.

Lipper's new categories also are based on the size of holdings, but add a new category called "multi-cap" to cover funds that invest across boundaries and buy stocks of all sizes.

Lipper also replaced "blend" with a "core" category. Core funds don't necessarily blend growth and value investment styles, but they do not stay pure to any style and may move between the two.

Lipper also changed how it decides to which class a fund really belongs. In the past, Lipper classified funds based on the objective shown in the prospectus, which is sometimes more wishful thinking than reality. Now, funds are categorized based on what is in the portfolio.

Fidelity Magellan, simply a "growth" fund in the old system, is now a "large-cap growth fund." It is joined in that new category by Janus Twenty, which previously was a "capital appreciation fund."

What's more, Lipper went back and ranked the funds in their new categories based on how they performed in the past. And that's where the short-term confusion could come from.

Sometime soon, expect a fund to advertise its status as the top-performing "multi-cap core fund" over the past 10 years.

Based on the reconfigured categories, this is true. Still, it's hard to believe that a fund could top a category for 10 years when the category itself did not exist until a few weeks ago.

Furthermore, adding categories automatically allows more funds to claim top performance within their peer group.

"The track record does not change, but the rank does," says Edward S. Rosenbaum, director of research for Lipper. "A small percentage of funds have earned their stripes the hard way by staying near the top in performance for years and years. Now, some other funds may be able to use revisionist history to say they were at the top of their group over all of those years."

That puts the onus on the consumer to dig deeper into performance. Lipper's not changing history here, just re-framing it; that means the actual return numbers are unchanged and above question, but historical data ranking a fund against its peers could be suspect.

"It's a reminder to be skeptical of anyone who says they are No. 1," says Marc O'Brien of O'Brien Management Inc. in Cambridge. "If you know that someone might not have been the best under the old system but could be the best now just because they are in a new grouping, it should make you want to look further into how ratings and rankings work."

What's more, rankings -- no matter what system they come from -- should not be the primary criteria for picking a fund.

Investors should buy funds based on the assets they want to insert into their portfolios, creating a balance between the various sizes of stocks and investment styles. Performance and rank against peers should be secondary selection factors.

Since the new Lipper categories give a much clearer picture of what a fund really owns, they will help anyone who builds a portfolio based on strategy.

"Investors should be putting the structure of their portfolio first, and better-defined categories will help them do that," says Roger Gibson of Gibson Capital Management in Pittsburgh.

"It's only someone who puts returns first who is likely to get bent out of shape by this.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at or at the Boston Globe, Box 2378, Boston, MA 02107-2378.

Copyright © 2021, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad