Michael Lipper hits out at security-based fund classifications

Michael Lipper, the president of the Lipper Advisory Services, has criticised himself for developing a classification system that characterises funds by the types of securities in their portfolios.

“I plead guilty,” he writes in his blog. “I plead guilty for the crime of characterising mutual funds and their kissing cousins, hedge funds, by the types of securities in their portfolios.”

Lipper sold Lipper Analytical in 1998 to Reuters after developing a security-based classification system for the business.

Under its new ownership, Lipper’s benchmarking and classifications have been used as an industry standard by asset managers, fund companies and financial intermediaries.

But Lipper now admits there are better ways of assessing portfolios, including evaluating thought patterns of the principal decision maker for each fund, which is mostly the portfolio manager.

“My enablers are the fund marketing people and the lawyers. At times we are all guilty of taking the easy way out. We choose to identify people by what they look like, not what they are, or more significantly how they think,” Lipper writes. (article continues below)

“I should have known better. I forgot my race track education of calculating my betting choices after examining the characteristics of the jockey, trainer, and breeding as well as the conditions of the race and the race track. Shame on me.”

Lipper is the official data provider for the Investment Management Association’s (IMA), which classifies funds by the types of securities they invest in.

The IMA says it is addressing its security-based sector definitions as part of its latest sector review, but it says security-based definitions still help break the fund universe down into manageable, comprehensible parts.