Friday, March 8, 2013

4 Steps in Using Lipper Leaders to Choose Investment Funds

(Thanks to Anonymous for sharing this.)

Lipper Leaders is a free online service under the Thomson Reuters brand that lets users screen and sort investment funds (e.g., UITFs and mutual funds) in various markets. In this post, I will take you through Lipper Leaders, how you can use it to choose a fund that best suits you, and some of its limitations.

1. Choose a fund type and classification

"Universe" pertains to market or country, so for most of us it's the Philippines. 

Under "Asset Type," we have the common types of investment funds: equity, bond/fixed income, balanced (under "mixed assets"). Please note that there are no "alternative" or "commodity" listed funds for the Philippines.

"Classification" refers to sub-types under main fund classes, such as different currency denominations for bond funds and geographic reach for equity funds.

The main "Asset Type" and "Classification" combinations that you should be interested in are the following:

Equity - Equity Philippines = for (peso-denominated) funds that are comparable with the PSEi
Bond - Bond PHP = for peso-denominated bond funds
Bond - Bond USD = for US dollar-denominated bond funds
Mixed Assets - Mixed Asset PHP Balanced = for peso-denominated balanced funds

"Fund Family" lets you choose funds offered by a particular bank. If you're looking for the "best" fund in an asset class, it would be best to leave this as "Any Fund Family."

2. Select a time period

Choices are 10 years, 5 years, 3 years, and Overall. "Overall" means since the introduction of the fund. Since UITFs have only been introduced in 2005 (or thereabouts), you'll only get limited results for "10 years." In choosing a time period, I suggest looking at the results for both "5 years" and "3 years" for consistent top performers.

3. Choose "Lipper Leaders" that match you goals

"Lipper Leaders" is just a fancy term for "selection criteria," or fund characteristics that investors should look at in selecting investment funds. Funds are rated in terms of these Lipper Leaders using a scale of 1 to 5, with 5 being the best for investors.

The five Lipper Leaders are:

Total Return = the total (accumulated) percentage change in the NAVPU of the fund over your chosen time period. A score of 5 indicates a high Total Return.

Consistent return = returns adjusted for volatility or risk. A score of 5 indicates consistently high returns

Preservation = ability of the fund to prevent loss of capital. A score of 5 indicates high capital preservation

Expense = a reflection of the fund's cost structure. A score of 5 indicates low fees and costs

Tax Efficiency = involves effects on taxes, but is limited to US funds

In choosing the "best" fund of a particular asset type, you can just leave the Lipper Leader boxes as "Any" and just sort the results later

4. View and sort results

After configuring the options mentioned above, click "Display Funds" to view the results.

The default view is sorted alphabetically by fund name. You can click on any column header to sort by that criteria. Clicking on the "3 Year Return" header, for example, will sort the funds from the lowest to highest return in the chosen period. Clicking it again will sort the funds from highest to lowest, like this.

You can also get more details about a fund by mousing over the fund name:

One limitation of the system is that it does not have information for fund costs, so you would have to get the information manually from monthly fund reports. In choosing a fund based on performance, please don't forget to consider costs because they do matter (remember that front/back sales loads are not reflected in the NAVPU).

Another feature that I would have loved is the ability to download historical NAVPUs, which are necessary in portfolio construction/asset allocation ( is not working anymore, anyone know alternative sources?).

Despite these limitations, Lipper Leaders is still a great way to choose funds from the multitude of offerings in the market. I'm sure that in choosing a fund, you may have other considerations than the ones listed above, such as convenience, customer service, or brand strength; still, looking at total returns is a good way to start.

JUST REMEMBER: Lipper Leaders screens and sorts funds based on past performance, and past performance is not indicative of future results.

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