What is the Lipper average?

Lipper average definition refers to a fund research tool developed by Lipper Inc. It is a set of Lipper indices used to measure how well an actively-managed investment portfolio is performing compared to its peers. 

Lipper average may also be used by investors to work out how well an investment firm, a hedge fund, for example, is doing compared to competitors.

Key points

Lipper average explained

What does Lipper average mean in a real-time example? You may hear the term in mutual fund adverts talking about how a percentage of funds beat the Lipper average. If it's at 90%, for instance, it means that the fund's returns were 90% higher compared to competitors.  

What are Lipper Indices?

Lipper indices are a series of benchmarking tools used to track the performance of a portfolio or of different funds. These indices are produced by Lipper, a subsidiary of Refinitiv, which is a subsidiary of London Stock Exchange Group (LSE).

There are several different Lipper Indices. Each index consists of the 30 largest funds for any given category. Categories are grouped by sector, industry, country and market capitalisation, meaning a fund might be above its Lipper Average for the sector but below the Lipper Average for funds of its size.

Lipper Indices are made up of an index's top 15 to 30 funds. With more than 400 Lipper classifications, investors can compare funds with similar investment mandates to benchmark fund performance. 

Each Lipper Index is created by averaging the returns of funds in the investable market that follow the Index's strategy. Assets Under Management (AUM) determine which funds are used to calculate index returns. 

Lipper covers mutual funds, closed-end funds (CEFs), exchange-traded funds (ETFs), hedge funds, domestic retirement funds, pension funds and insurance products. These indices measure the overall average performance of the funds across the various Lipper peer groups, according to the Refinitiv’s Lipper Indices methodology document of 2019.

How does Lipper average work?

Lipper averages the results of actively managed funds as groups. The groups are arranged by fund classification, such as small-cap growth or mid-cap growth. This classification helps to compare mutual funds within the same category.

Lipper averages may vary when assessed at different points in time, even if the performance period is the same, according to the methodology. As a result, the method is better suited for peer group comparisons at a specific point in time. Rolling sub-period Lipper averages can be used to generate a return time series for statistical analysis.

The Lipper average serves as an effective incentive for portfolio managers to strive to surpass the benchmark and differentiate themselves from their rivals.

Lipper Leader rating explained

The Lipper Average classifies funds using a diversified equity approach. It compares funds based on five key performance metrics.

Lipper Leader metrics

• Total return: funds are ranked based on their total return.

• Consistent return: funds that demonstrate consistency and risk-adjusted returns rank higher.

• Preservation: funds that outperform in its asset class - equity, mixed equity, or fixed-income - in terms of capital preservation in a variety of markets rank higher. 

• Expense: funds that have successfully kept expenses low compared to its peers and within the constraints of its load structure also rank higher.

The fifth metric, tax efficiency, is applicable only in the US. The method ranks funds from one (the lowest) to five (the highest) based on their Lipper Average.

Lipper Leader calculations

Scores are updated monthly, and calculated for  three years, five years, ten years and overall. The overall calculation is based on a three-year, five-year and 10-year averages of percentile ranks for applicable metrics.

Lipper Leaders are the top 20% of funds in each peer group in terms of each metrics. A fund that gets Lipper Leader status has a five-star rating.  

The next 20% receive a rating of four, the middle 20% receive a rating of three, the next 20% receive a rating of two, and the lowest 20% receive a rating of one. This fund rating system is called Lipper Leader Rating System

With the rating system, Lipper average can be used as a valuable indicator for investors to identify leading funds. It also helps investors to select funds that suit their style and goals.

Lipper Averages drawbacks 

Lipper averages include only actively managed funds, and exclude benchmarks or indices such as the S&P 500 (US500). 

The primary distinction between actively managed funds and indices is that the former have overhead costs and require extensive research before selecting stocks. Index funds, on the other hand, typically have low overhead costs and charge very low fees due to their passive nature.

The Lipper average only considers funds that are still operating. If a fund outperformed the Lipper average for its category in the past years, say in 2009, but is no longer available, the Lipper average is retroactively adjusted to only reflect funds that are still available.

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