Newspaper article St Louis Post-Dispatch (MO)

Star Wars Fund-Research Firms Argue over Whether Ratings Make Sense

Newspaper article St Louis Post-Dispatch (MO)

Star Wars Fund-Research Firms Argue over Whether Ratings Make Sense

Article excerpt

In a world that prizes five-star restaurants, four-star movies and the Good Housekeeping Seal of Approval, what's wrong with a rating system for mutual funds?

Plenty, believes A. Michael Lipper, head of Lipper Analytical Services Inc. Lipper has been tracking mutual-fund performance for 21 years.

Putting a five-star label on mutual funds, Lipper maintains, leads investors to believe those funds will be the winners of the future - and it just isn't so.

Lipper's complaints, delivered in a memo to mutual-fund executives in May, were directed at Morningstar Inc., his main rival in the mutual-fund research business. Morningstar, now 10 years old, has developed a star system for rating mutual funds that is widely quoted in advertisements and used by investors.

Morningstar officials quickly called foul when they heard of Lipper's criticism. The star rankings were never intended to predict how funds would do in the future - only to tell investors how the funds had done in the past, said Don Phillips, publisher of Morningstar Mutual Funds.

This nasty little spat between Lipper and Morningstar came at a time when the Securities and Exchange Commission is talking about the idea of a labeling system for mutual funds that would include risk levels.

But it may be difficult to find a practical way to label funds - which change their investments rapidly.

Phillips pointed out that the user's guide to Morningstar publications always has made it clear that the research service was not trying to predict future performance and that the stars were only a first screening for an investor who is choosing mutual funds. The guide describes the stars as "more descriptive than predictive."

The chief difference between the Lipper and Morningstar operations is the difference between a scorekeeper, who tells you who is winning and losing, and a game analyst, who tries to tell you what the score means and what strategies worked.

Lipper's firm ranks funds by gains or losses over various time periods and compares their performance with other funds that have similar investment goals.

Morningstar, on the other hand, reports the numbers but also analyzes a fund's behavior, its investment policies, its sales charges and the amount of risk it took to achieve its results. …

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