Anyone wishing to invest in a fund can choose between thousands of different ones. The ratings provided by agencies like Morningstar, Lipper or Standard & Poor’s (S&P) help you to compare funds by scrutinizing every fund in detail based on various criteria and giving each fund a rating. Here they take account of qualitative and quantitative factors.
How can I assess the quality of a fund?
Assessing a fund’s quality is an extremely complex task. The easiest way to do this is by looking carefully at the ratings. Ratings are evaluations by independent experts and provide information about the quality of a fund.
Quantitative aspects: performance, risk, comparisons
Performance is an extremely important criterion in fund ratings. As a fund’s performance is only really meaningful in relation to comparative figures, it is generally measured against that of the competition or the market. Performance is often also compared with the risk entered into. This allows you to quickly determine how well a fund is really performing. The second quantitative factor is risk: volatility, for example, provides good information on how significantly a portfolio’s returns fluctuate.
Qualitative aspects: scrutinizing fund managers
It is not just hard figures that are decisive factors for rating agencies: they also closely scrutinize the investment process, risk management and even the corporate culture of the fund management company. Finally, it is not just the companies or states whose securities make up the fund that have to be analysed but also the people who select these securities and the strategy they pursue.
Stars, letters and grades
The rating agencies’ results are published as grades. They are not school grades but can be given as stars or letters. Morningstar, for example, issues between one and five stars, with five stars being the best rating. This enables investors to easily determine the quality of their fund compared to the competition without having to analyse key figures and coefficients in detail.
Awards for the best funds
Outstanding funds regularly receive awards. The “Lipper Fund Award” is the most prestigious accolade for funds and is presented once a year by the independent fund analyst Lipper. Lipper gives awards to funds and asset managers who have performed outstandingly well in their category and over a certain period of time.