Mutual Fund Ratings – Two Big Guns and Several Pistols

While Lipper, Inc. has the longest history in the arena of mutual fund ratings, the current big gun is Morningstar.

The Former Biggest Gun – The Lipper Approach

Lipper started out in 1971 back when there were only a few hundred funds — not several thousand — and back when less than 5% of households in the U.S. even owned mutual funds (Even today Lipper is more targeted at professional investors and money managers than “mom and pop” investors, but if you want to pay, you can have the service). Funds are ranked based on ‘performance risk’ which translates into the higher the risk, the higher the rating.

Lipper has a five point rating system that includes the following five different criteria:

  • Total return
  • Consistent return
  • Preservation
  • Tax efficiency
  • Expenses

The idea is that with a lower risk rating, the investor has less risk of losing money. But in the mid-80’s, a new gunslinger came to town…

The New Big Gun – Morningstar’s Approach

Morningstar joined the ratings game in 1985. Their “stars” rating system is now seen in mutual fund ads in virtually every financial publication. It’s designed to be a simple system to make it easier for  fund investors looking to upgrade or evaluate their portfolios. Starting with a “risk-free” return, the company then builds on that to generate a risk-adjusted rating for each mutual fund. These ratings are now broken down into numerous categories (around 70 different groupings!) with the idea of making it easier to compare apples to apples.

Of course, one problem is that any rating system just about has to be based on past performance. That being the case, there is not a huge amount of value regarding determination of the actual risk factor of a fund.

In an attempt to see into the future and predict how a fund might perform, Morningstar will begin adding a 5 level “Triple A” rating system to its famous 5-stars system in October 2011. For example, funds rated “AAA” — the highest rating — will be those mutual funds that Morningstar “believes” to be in the best position to deliver strong returns in the future.

More Choices for Mutual Fund Ratings (in no particular order)

  • Money Magazine – Publishes their own list of  “the 70 best funds” each year.
  • – Assigns letter grades from A to F and also has a free mutual fund screener.
  • – Consolidates information from 5 different ratings sources and then creates their own score for over 4,500 mutual funds. Plus they have their list of the “50 best funds for the everyday investor”.
  • Business Week – Their database has 11,000 funds and a free screener with over 50 criteria you can use. Also provides pre-defined screens for funds in different categories, and has a free S&P Global Funds Screener.
  • Bloomberg – Ranks U. S. funds and has a free screener so you can see where funds you own rank in their system.
  • Zack’s – Assigns a mutual fund rank
  • Standard & Poor’s
  • Yahoo! Finance – Also has a comprehensive mutual fund screener
  • Forbe’s – Claims to stand apart from other ratings services because they offer ratings for both bull and bear markets.
  • – Loads of information including Lists of funds organized by sector, region, and categories. Also has information on famous investor portfolios like Warren Buffet and George Soros.

These are just a few of the many companies that seek to provide guidance on fund investing through their mutual fund ratings…keep looking and you’ll find more.

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