Lipper to Compete With Morningstar in Rating Funds

Mutual fund tracker Morningstar Inc. will face new competition starting next month as Lipper Inc. launches a fund-ranking system of its own.

Lipper, a unit of London-based Reuters (ticker symbol: RTRSY), said Wednesday that it will rank stock and bond funds starting in October based on two criteria--consistent returns and capital preservation--in an effort to expand its business with individual investors and financial advisors.

“We’re building a tool kit as we make a push into the advisor marketplace and broaden our brand name with the public,” said Robin Thurston, Lipper’s research director, who said the firm will roll out rankings in additional criteria next year based on feedback from users.

Morningstar’s “star” ranking system, launched in 1985, has become an industry standard in rating funds based on past performance.

Fund companies often hype their “five-star” offerings. According to a recent study, the Morningstar rankings can significantly affect the amount of cash flowing into funds, even though they are not meant to predict future performance. Ironically, the performance of top-rated funds often falters after new cash pours in.

Lipper will rate funds based on trailing three-year records, as Morningstar does, so very new funds will not qualify for a ranking. Funds will be rated from 1 to 5, with 1 being best.

The consistent-returns ratings will evaluate funds within their specific Lipper peer group, such as small-cap value, mid-cap growth or emerging-markets equity. Funds with strong and steady returns relative to their category will receive the best ratings.

The capital preservation rating will assess funds within their broad asset class--either equity, fixed income or “mixed equity,” meaning a combination of stocks and bonds. Funds with the smallest cumulative losses in their down months during the previous three years will get the best preservation ratings.

Investors and advisors will be able to access Lipper’s rankings free at its Web site https://www.lipperleaders.com, which is currently designed for European users.

“This is a screening tool that can be helpful in assembling or evaluating a portfolio, but investors should also look at things such as manager tenure, fees and expenses,” Lipper spokesman Sean McLaughlin said.