The mutual fund world is thriving right now and if you are looking to venture into it, you need to do it right.
Luckily, in this day and age, you can get help in the form of analysis and advice from professionals via a simple click of the mouse button. Forgive the cliché.
Morningstar and Lipper are some of the most recognized services when it comes to that.
You are probably torn between the two, and you cannot use both at the same time. In this guide, we are going to compare the two services so that you can decide which one will suit you best. Let us get to it, shall we?
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Let us begin by letting you in on what both companies are about.
Morningstar is a company based in the US and it focuses on rating investments. Over the years, the company has developed tools, ratings, and research to facilitate the same. Presently, Morningstar is among the most trusted market analysis firms.
The company has over 5,000 employees whose main job is to carry out research and has approximately assets worth $215 billion under its wing.
As for Lipper, the focus when it was founded was to provide data and assessment to mutual fund companies especially in the US. However, in the following years, the company expanded through mergers and growth.
Just like Morningstar, this company offers investment analytical services as well.
Let's talk about the companies’ ratings.
Morningstar launched its first rating in 1985. It focused on several brand categories and gathering of data rather than detailed assessment. Nevertheless, the system was revamped in 2002 with categories of the new fund being integrated and groups created to highlight modifications besides management styles.
Presently, the company arranges mutual funds after looking at the investments in a particular fund portfolio. Generally, the company's ratings are founded on a bell curve distribution. That means that the platform uses the probability distribution of a particular stock's past returns to predict future returns.
Morningstar rankings are updated every month.
When it comes to Lipper ratings, it is done based on five facets including tax efficiency, total returns, expense ratios, capital preservation, and return consistency. The platform essentially categorizes all the five ratings for mutual funds and allows investors to pick.
Every category is given a rating on a one to five scale. For instance, a mutual fund can be rated there for tax efficiency and five for return consistency. Ratings on this platform are released each month as well.
What we gathered here is that Lipper would be the best option for tracking performance, depth, and customization of mutual funds while Morningstar has the upper hand when it comes to effective risk measurement, simplicity, and transparency.
As far as the performance evaluation, Morningstar requires a mutual fund to have been in existence for more than three consecutive years. This is because the platform uses prior performance on the funds to adjusts using costs and risk properties.
Conversely, Lipper's objective is to offer advice to financial advisors and individual investors about what mutual funds are best for their investment goals and style. The criteria used to give the advice focuses on strong and consistent returns.
Both platforms separate equity funds into three main groups which include foreign, international, and domestic. They also have three market-capitalization columns and rows. However, what you want to note here is that Lipper features an equity income classification while Morningstar does not.
When it comes to local equity funds, both platforms have practically similar groupings although each grouping memberships do not entirely overlap. Explicitly, both Lipper and Morningstar have groupings for Europe, Latin America, and Pacific Asia.
Lipper features three classifications as far equity in the form of natural resource funds and energy. Morningstar only has two. When it comes to equity segment funds, the two companies do overlap with classifications for funds that focus on utilities, communication stocks, precious metal miners, and the like.
Risk vs. Return
Mutual fund rating tools are usually centered around risk-adjusted precautions like the likelihood of future losses that an investor has to consider before earning returns. For both platforms, the risk-adjusted measure is based on an assessment of the typical performance for a specific fund category.
What that means is that the mutual fund would look bad or good based on how its losses and returns correlate with fundamental indices for the grouping. For example, large-cap monies are gauged against a noteworthy large-cap index, like the S&P 500.
Now, there is a chance for such a system to have errors because barely being dissimilar to an index could cause simulated improvements as far as fund rating. A 75% mid-cap fund can be compared to a key mid-cap index, however its 25% introduction to small caps could improve returns adequately enough to offer it a rating increase, irrespective of the manager's performance.
This is particularly challenging for Lipper since it includes an information ratio as far as its calculation that is thought to be extremely sensitive to the index choice. Morningstar does experience the same but to a lesser extent. Therefore, as an investor, you must consider the difference between mutual funds and their comparative indices.
As we have already mentioned, both Morningstar and Lipper classify funds based on their performance in the last three years. However, Lipper gives more weight to recent portfolios. Morningstar does weigh portfolios but it classifies funds based on a fixed income and alternative funds.
We can say that Morningstar's system is based on both medalist (forward-looking) and star (retrospective) ratings. The thing about Lipper is that it only has star ratings. Morningstar's categories are incorporated in the company's allocation models while Lipper's classifications can be used in allocating assets. That said; the firm does not allocate assets.
Lastly, Lipper does not in itself assess funds based on its categorization system. On the other hand, Morningstar uses its classification system to offer a qualitative interpretation.
The Takeaway: Lipper versus Morningstar
To sum it all up, here is what you need to take home as far as Lipper.
- The platform is a mutual fund research that is utilized by investors all over the world with its most recognized feature being the Lipper Average
- Lipper's fund categorization technique is based on a U.S. Diversified Equity (USDE) prototype. The platform retains its standards for intercontinental funds as close to the USDE prototype as possible
- The USDE model that we have just mentioned evaluates mutual fund style as well as market capitalization. The style associates with the features of each of the corporations in the specific fund
- The "Lipper Average" is a well-cited reference to the yearly return of a fund compared to its counterparts in the same group, as classified by the Lipper Index
What about Morningstar?
- It is a first-rate ETF and mutual fund rating agency
- The company's services are used by numerous big names including the regulatory authority and financial industry
- Studies reveal that the platform's ratings were not the best way to forecast performance when gauged against a benchmark
- Morningstar admits that its rating system focuses on mutual fund past performance and is therefore not designed to forecast future performance accurately
Morningstar Vs Lipper: Final Verdict
We feel that both Lipper and Morningstar offer great services that can go a long way in improving decision-making.
With Lipper, you get to measure the performance of your investment portfolio or mutual funds against similar investments.
Morningstar, on the other hand, does pretty much the same thing. Only that it is ideal for investors who want to understand the thought process behind each investment recommendation.
You just have to figure out what kind of investor you are and that will lead you to the right platform between the two.
Blake is a self-made online day trader with a knack for adventure. On his free time, he loves reading and learning new methods in the trading as well as improving his jiu-jitsu skills. He currently resides in New York City.