I’m sure you’ve heard the commercials from T Rowe Price that talk about lipper averages. They typically go like this:
Our disciplined, long-term investment approach has proven successful in a variety of market conditions. In fact, for each 3-, 5-, and 10-year period ended 9/30/09, 80% of our funds beat their Lipper average. Put the expertise of T. Rowe Price to work for you.
So, What Is a Lipper Average?
Lipper is a Thomson Reuters company that supplies mutual fund information, analytical tools, and commentary. Basically, they take the results of active mutual funds (ones run by a fund manager) and average them as a group. The groups are broken into several categories such as international, small-cap, mid-cap, income, etc. So, when an active small-cap mutual fund company says that it beat 90% of the funds in its Lipper average, it means that it had a better return than 90% of the other active small-cap mutual funds.
A downside to these averages is that they are only looking at its actively managed peers. In other words, a mutual fund could lose 40% in one year but still beat 95% of its peers. That certainly is putting a positive spin on something negative, wouldn’t you say? What if the Russell 2000 (index fund for small-caps) lost only 10% that year? Some investors may think that they are getting a great mutual fund because it beat out its peers when they could have done much better just investing in a low-cost index fund.
Mutual fund companies are also using this spin to keep its customers in funds which may have high fees. By stating that the fund beat out most of its peers, the investor thinks that they are getting a great deal. Once again though, they may have been better off investing in a low-cost index fund.
I guess my main point here is to always do some research before investing. Never just take the word of a financial advisor, broker or mutual fund company. They typically have a financial incentive to say what they say.