Upgrading Lipper Fund Classifications 2019

In 2019, Lipper is upgrading our fund classification schemes. This is a process fundamentally embedded within our business. It is a core part of our DNA. Simply put: categorizing funds is what we do.

There are two main schemes that will benefit from the release: US and Global.

The Lipper US Fund Classifications are designed exclusively for the world’s largest fund market. They are delineated into open-end, closed-end and variable annuity categories.

The broader Lipper Global Classifications (LGCs) include all of the above US funds, but also provide our customers with a single definitions-based approach across all markets and funds. Our commitment to transparency and thoroughness is unique. We have more than 400 categories in our current LGCs and are adding more as the fund market evolves.

Fund classification – a changing science

Fund classification was once relatively straightforward. Collect the market benchmark, identify the funds with that benchmark and then create categories where you have a defined critical mass of funds. This plan still holds perfectly true for many of Lipper’s proprietary sectors and this will continue.

After the global financial crisis, the assignment of funds into sectors has become increasingly complex. The last ten years have seen a sea change in the way that fund managers attempt to protect themselves from any future catastrophic market events. Our classifications continue to evolve as the industry releases new styles of funds to address these issues.

Product evolution needs to be incorporated

We continue to see the growth of “target” and outcome-based funds—funds with no benchmark that aim to provide a stated return within a certain timeframe. Other product types such as liquid alternatives, absolute return funds and multi-asset funds are also becoming increasingly popular.

Being able to make relevant fund comparisons is always crucial, but a new system for classification is necessary. The “signposting” technique is often employed. What does that mean? We have to acknowledge and accept that not all target funds will behave in the same way. This is often true even when funds possess a similar “hedge-like” strategy. Lipper’s job is to identify similar “outcomes” which can lead to a clearer investor “signpost”. In other words: “Here are the funds you may choose that have the same ‘outcome’ in mind.”

Classifications: art and science

There is actually more subjectivity involved in fund classification design than one might immediately think. It is invariably a mixture of art and science. Educated investment specialists can still fail to agree on where or how a particular fund should be classified and which categories should be created.

Conflicting opinions on the highest priority attributes (and subsequent classification triggers) can all be “technically correct”. Different approaches can validly exist. For instance: Should we prioritize geographic exposure over currency exposure? How many countries constitute sufficient diversification for a regional class? How much does hedging matter? What exactly do we mean by “funds with a predominant weighting to…”?

What makes a robust fund classification system?

It is paramount to have a consistent rules-based approach. Subjectivity can only be tolerated in the design of the classification system itself, but not the classification of individual funds. To this end, Lipper’s analysts receive constant training to ensure that objectivity and consistency reign supreme.

The system needs to be fair, independent and free from any external influences and bias. Trust is still a major part of our philosophy. The classification systems drive the Lipper Fund Awards and the Lipper Ratings system. We take these responsibilities very seriously indeed.

We look forward to delighting our customers with an improved fund classification suite. Watch this space for further specific details about the forthcoming release of Lipper Classifications 2019.

Lipper and Refinitiv customers can find more information via this link.