Meet the Street: Measuring Funds by a Different Bar

Most fund investors are familiar with the Morningstar star rating system to gauge the performance of mutual funds, sometimes even asking for it by name.

Jeff Tjornehoj, Research Analyst, Lipper

Recent Meet the Streets

Deutsche Bank Alex. Brown's Douglas D. Mitchelson

Columbia University's Bruce Greenwald

Yorkton Securities' Jacques Kavafian

The Toy Report's Chris Byrne

Rival fund-tracking firm Lipper is hoping to change that with its new "Lipper Leaders" fund-rating system. Available for free to individual investors at www.lipperleaders.com, it looks beyond performance to such fine-tuned factors as consistency and preservation of capital.

Jeff Tjornehoj, a research analyst with Lipper, explains why his company feels these measures are so important in this volatile market.

TSC: Can you please explain for the individual investor what you mean when you refer to "consistent performance" and "preservation of capital"?

Tjornehoj: Consistent return refers to smoother and better risk-adjusted return than its peers over the past three years. Preservation of capital refers to a fund that has done better than the rest of its asset class at avoiding losses.

TSC: How is this any different from anything with the other fund analysis tool that's already out there -- or with anything that Lipper was already doing before?

Tjornehoj: Well, Lipper wasn't doing anything in this area before. Our focus for years has been on the institutional adviser and fund companies.

And now we have taken a broader view of things, realizing that we've got terrific data out there that's very useful for a number of channels. [Our thinking was] why not do something that can serve the intermediaries and the individual investors.

TSC: What are some examples of funds that are Lipper Leaders but that don't show up well on other measures?

Tjornehoj: (AQBLX Quote)Aquinas Small-Cap Growth is a two-star fund according to Morningstar. But it is a Lipper Leader for Consistent Return within Lipper's Mid-Cap Growth category because it has a strong trend of solid risk-adjusted return, relative to the category.

As an example, through Oct. 31 the fund was down 22.33% for the one-year period, vs. 38.65% for the category. So if an investor wanted to have exposure to that out-of-favor category, this might be a fund for further consideration (that further consideration might include looking at manager tenure, size of the fund, expenses, etc.).

Another example is a tiny fund called (PADIX Quote)Pacific Advisors Income & Equity, which is a two-star fund according to Morningstar, but is a Lipper Leader for Preservation because, for the past three years, the fund has avoided losses better than its peers in the Mixed Equity asset class (Mixed Equity has categories like Balanced Funds, Income Fund, Convertible Securities Funds, etc.).

A Different Way of Looking at Funds Percentage of Lipper Leader funds at largest fund families

Percentage of funds eligible to receive a Lipper Leader score that were named a Lipper Leader for Consistent Return, a Lipper Leader for Preservation, or both as of Oct. 31, 2001. The number of eligible funds ranges from 33 at Janus to 380 at Fidelity.

TSC: So obviously, there are things other than performance that Lipper is telling investors that they should pay attention to.

Tjornehoj: Exactly: And it's risk. We had been hearing [for] so long in the heady '90s about performance and fantastic year-over-year returns, some in the three figures. Unfortunately, the downside is that there is a downside. And we don't always make that money consistently.

Everybody has a different idea of what risk means to them, and the measures that are widely available now are either too broad or they're too technical. So we wanted to break it down a little bit and base it on sensible ideas about what risk can mean to them, and tell it with understandable tools.

TSC: How is Lipper going to promote this new rating system? Morningstar really seems to be the name most people go by now.

Tjornehoj: Morningstar has done a wonderful job talking to investors about risk and returns through the Morningstar system, and they have been able to do so by getting the fund companies to recognize the validity of their program.

What happens is that the fund companies then use those star ratings in their advertisements. We expect to do the same thing. We really do expect the fund companies to use the Lipper Leaders initial two categories for preservation of capital and consistent return in their advertisements because there are a lot of great stories about certain funds that have been overlooked because their total return performance has not been outstanding. But they have great characteristics vis-¿-vis risk that are worth talking to investors about.

TSC: How much is this going to cost an individual investor?

Tjornehoj: It's free.

TSC: This is kind of a curious thing to be doing in this time period given the prevailing trends, isn't it?

Tjornehoj: The great thing about the dot-com industry is that it allows data to become available to individual investors. But we really don't have any products to sell to individuals. Our data are still geared toward the institutional side, and we are making headway into the intermediary channel.

What we are hoping is that through individual investors' appetites for this data, we will be able to begin charging fund companies for our expertise in evaluating them. Maintaining the lipperleaders.com Web site will only cost us pennies per day.