Reading 2021-07-16


  • Ref:: Investopedia
  • Title:: The Lipper Rating System Explained
  • Author:: Sean Ross
  • Year of publication:: 2019
  • Category:: Blog
  • Topic:: #topic.investment

Notes from reading

Lipper is a fund research tool used by investors around the world; its best-known feature is the Lipper Average.

The company's fund-classification strategy is based on a U.S. Diversified Equity (USDE) model; it keeps its standards for international funds as close to that USDE model as possible.

Lipper Classifications Methodology

According to Lipper, the company uses a U.S. Diversified Equity, or USDE, fund classification strategy

This model separates the classification process into two steps. First, a fund's market capitalization is considered. Only after the market cap has been established is the fund's style classification assigned. Style is based on the fundamental characteristics of each holding in the fund from the data Lipper receives from the fund companies themselves as well as independent data providers.

Every fund has different values assigned based on various characteristics. For example, funds in the Diversified Equity classification are judged based on price to earnings (P/E), price to book (P/B), price to sales (P/S), return on equity (ROE), dividend yield and, if available, three-year sales growth. Lipper considers all of these when determining the style for the fund.

How Classifications Are Determined

To be classified as large-cap, at least 75% of the fund's weighted equity assets must be concentrated in the large-cap threshold. The same 75% model is applied to mid-caps and small caps as well. By Lipper's own admission, there is more statistical flexibility for mid- and small-cap funds in how their portfolios are constructed.

After the market cap is sorted out, a fund's style needs to be assigned. This is accomplished through something Lipper calls the "individual Z-score" for each period. For each characteristic considered, such as dividend yield or return on equity, a Z-Score is calculated by subtracting the index-weighted average score from the fund's characteristic value-weighted average and then divided by the characteristic index-weighted standard deviation.