Ever hear a company say that their funds have beaten the five year Lipper Average? Or the ten year Lipper Average? If you’ve ever heard a T. Rowe Price commercial, where they talk about how they understand the connections of a complex, global economy; you’ve heard someone make the claim that some percentage of their funds beat their 10-year Lipper average (in their case, it’s over 75%). If you’re like me, you just ignored it because you have no idea what the Lipper Average is and companies make claims all the time.
Well today we will find out what the heck a Lipper Average is and why those claims matter.
Lipper refers to Lipper Analytical Services, a subsidiary of Thomson Reuters, and they produce a series of investment benchmarks using industry data. For each category, they take a collection of the thirty largest actively managed mutual funds in that category and build an index. Much like how the S&P 500 index is an index of the five hundred companies in the S&P, Lipper creates something similar but with thirty actively managed mutual funds in that category. The Lipper average is the average of each mutual funds’ respective performances.
The idea is that it’s fairer to compare a mutual fund or ETF against an index of its peers, rather than a passive index fund. So when T. Rowe Price says that 75% of their funds beat their 10-year Lipper average, it means that 75% of their funds outperformed their peers over the last 10 years.
Problems with the Lipper Average
You can probably tell that I don’t really find much value in the claim that a fund beat its Lipper Average because these are all actively managed mutual funds with relatively higher expense ratios and fees, compared to index funds. I don’t care if you beat your Lipper average, I want to know if you beat the S&P or whatever benchmark is fair for that mutual fund. I can pay Vanguard an expense ratio of 0.17% to get into their Vanguard 500 Index Fund  (0.05% in the Admiral shares  if I have $10,000 or more), I want to know if you can beat that if I’m going to pay you more.
As an aside, while I am a proponent of index funds, I understand the value of actively managed funds in a diversified portfolio. That said, you can get very diversified on low cost Vanguard funds.
Also, it’s really easy for the marketing folks to spin this statistic because averages are deceptive. If your fund lost money every year for the last five years, but lost less than your peers, then you could still claim you beat the Lipper Average. It sounds better than saying you lost money every year for the last five years! 🙂
There is one positive thing I can say about the Lipper Average – if you have your heart set on an actively managed fund, you should probably pick one that has beaten its group’s Lipper average for the last five or ten years. While the past isn’t indicative of the future, I have more confidence in a manager that has beaten the pack consistently in the past.
Or… pay less and go with an index fund.