On 24 March, Portfolio Adviser will unveil the winners of the Refinitiv Lipper UK Fund Awards. Why does this matter? It matters because these are purely quantitative awards, which are based on the most comprehensive set of fund data, stretching back decades, and represent the gold-standard for institutional asset managers throughout the three, five and 10-year periods under review.
And, of course, that now contains quite a year. The FTSE 100 ended 2020 at 6,460, and 2021 at 7,384. Over the intervening 12 months, the index has headed steadily upwards – certainly in comparison to the preceding year. At the same time, however, the economy has had to deal with multiple uncertainties, including the trajectory of the pandemic, fractured global supply chains, resultant commodity and transport-cost hikes, and the raising of the spectre of inflation—something that all but the longest-in-tooth fund managers have not had to contend with in any sustained fashion.
If 2020 – the nadir of COVID – was ‘a year like no other’, then 2021 was itself far from a return to normality. Indeed, we are arguably still in a phase where things are far too uncertain to determine what the ‘new normal’ – that most overused of financial cliches – may look like.
It almost goes without saying that delivering market-beating returns against this unfriendly backdrop has tested fund managers’ mettle. In such an environment, fund selectors and direct investors need the best data on which to base their decisions – and, what is more, the best methodologies to use that data to determine what ‘good’ should look like. That is why Refinitiv Lipper’s fund awards, and the methodology on which these are based, make an invaluable tool for investors in determining what the best funds have been over the periods we analyse.
Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Its methodology has more than 500 different granular categories across all the relevant asset classes, ensuring valid like-for-like comparisons are made across asset classes, geographies, currencies and strategies.
This year, in the UK element of the fund awards alone, we ran our metaphorical slide rule – or, rather, an exhaustive number of different slide rules – over almost 3,000 different collective investment schemes, for 247 awards. If that seems like rather a lot of awards for the 3,000, don’t forget that each classification – where appropriate – has awards for three, five and 10-year performance.
While these awards are entirely quantitative, this should not be understood in the sense of raw return numbers alone – award-winners are not determined by picking the funds with the highest returns over the respective awards periods.
Rather, they are chosen using the Lipper Leaders system, developed over many years of fund analysis. This is a toolkit to guide investors and their advisers in selecting funds that suit individual investment styles and goals. It uses investor-centred criteria to deliver a simple, clear description of a fund’s success in meeting certain goals, such as preserving capital or building wealth through consistent, strong returns.
The Refinitiv Lipper Fund Awards are based on probably the most important of the Lipper Leaders scores – the rating for Consistent Return. These ratings are calculated using a utility function based on the effective return over multiple non-overlapping periods – within those respective three, five and 10-year horizons.
The calculations over multiple timeframes ensure all periods in which a fund underperforms the average of its peer group are identified. Then, Refinitiv Lipper uses a utility function based on behavioural finance theory to penalise periods of underperformance against the peer group average, with more significant weightings being given to excess losses.
Consistency is key
This calculation methodology ensures the winners are funds that have provided superior consistency and risk-adjusted returns, compared with similar funds. We believe this is more in line with how investors view financial gain and loss, meaning funds receiving a Refinitiv Lipper Fund Award may be the best fit for investors who value a fund’s year-to-year consistency relative to other funds in a particular peer group. The highest Lipper Leader for Consistent Return value within each eligible classification determines the fund classification winner over three, five or 10 years.
Alongside identifying the best individual funds within Lipper Global Classifications, we also use our data to identify the best manager for equity, bond and overall groupings. We further break this down into small and large managers. Groups with at least five equity, five bond or three mixed-asset portfolios in the respective asset classes are eligible for a group award. Small fund groups need to have at least three distinct portfolios in one of those asset classes. The lowest average decile rank of the three years’ Consistent Return measure of the eligible funds per asset class and group will determine the asset class group award winner over the three-year period.
In a world where ill-founded opinion vies for airtime with well-grounded research, it is more important than ever to be able to identify the latter. That is why we think this methodology is important – and will continue to be important as investors seek to ensure their money works hard for them in increasingly trying times.
Dewi John is head of research UK & Ireland at Refinitiv Lipper