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May 26, 2023

Lipper’s Holdings-Based Classification Model Expands Regional Analysis

by Jack Fischer.

Since 1999, Lipper has classified eligible equity funds based on the fundamentals of the portfolio’s underlying holdings. Over time, while various updates were applied to the quantitative model, the outputs remained a constant staple in the investment industry.

The group of Lipper equity classifications that are analyzed by the model is known as the Holdings-Based Classifications or HBCs. Altogether, the classifications create the famed style box matrix which depicts a portfolio’s primary allocation to size and fundamental style of the investments held within.

This past week, Lipper has rolled out a new methodology to this model. The new methodology has three primary benefits: 1) expands the number of portfolios Lipper can run through the model, 2) allows for bottom-up analysis at the individual stock level, and 3) provides additional quantitative data points for each eligible fund.

U.S. managers will not only have their sector equity, regional equity, and mixed-assets portfolios run through this model, but will also be able to see the size, style, and region for their UCITS or ex-U.S. funds as well. The style box can now be created for all eligible funds.

This article is going to focus on one of the additional quantitative fields that are populated as a result of the Holdings-Based Classification model expansion—“HBC Region.” HBC Region is a time-series field that will populate a country or region based on the latest holdings data provided by a fund. First, you must know that Lipper has broken its global database of securities into 11 regional stock universes (RSUs), and each RSU has individual countries underneath. For example, at the top of the waterfall structure is the “Global” naming convention, then one step down is each RSU (i.e., “Developed Europe [ex-U.K.]”), then the individual countries (i.e., “Germany”). The geographic assignment looks at the eligible equities within a fund as of a specific date and applies a 70% rule. If the fund invests 70% or more in German securities, then the fund will receive a “Germany” HBC Region. If the fund invests in less than 70% in Germany, but still 70% or more in the Developed Europe (ex-U.K.) RSU, then the fund will receive a “Developed Europe (ex-U.K.)” HBC Region. Lastly, if the fund is not invested in 70% or more in any single RSU, then the fund will populate a “Global” HBC Region.

These quantitative fields not only hold managers accountable by showing exactly where their fund is primarily invested but also allows for additional peer group analysis. For example, if you are a U.S. manager with a fund in the European Region U.S. Mutual Fund Classification and may be wondering why is it that your fund is seeing outflows against the classification inflows, HBC Region might be able to paint a part of that story. The top inflows by single country under the European Region Classification are Germany (+$309 million) and Italy (+$82 million); while the top outflows year to date are the United Kingdom (-$337 million) and Switzerland (-$191 million). This same breakdown can be applied to performance, expenses, etc.

Zooming out to look at all eligible U.S. funds that are run through the Holdings-Based Classification model, the top year-to-date inflows by primary region/country go to Developed Europe (ex-UK) (+$8.4 billion), Emerging Markets Asia ($4.6 billion), and Australia (+$531 million).

The top outflows by region/country year to date are the United States (-$60.7 billion), Global (-$15.6 billion), and Europe (-$871 million).



Performance-wise, the top five primary regions/countries in trailing one-year total return are Turkey (+43.57%), Mexico (+27.10%), Emerging Markets Europe (+25.87%), France (+23.31%), and Ireland (+22.64%). Bottom five primary regions/countries are Pakistan (-38.03%), Colombia (-31.36%), Vietnam (-30.30%), Qatar (-20.98%), and Israel (-18.19%).

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