Lipper's rating and the performance of unit trusts in Malaysia

Purpose – The purpose of this paper is to examine the risk-adjusted performance of rated funds and
determine the usefulness of Lipper Leader rating of unit trusts in Malaysia during the period 2000 to
2010.
Design/methodology/approach – The paper utilizes the Sharpe ratio, Treynor ratio, Jensen’s alpha
and Fama-French three-factor model to measure performance.
Findings – During the period of study, the performance of the market index and risk-free rate
outperformed that of 68 equity unit trust funds in the 3-year, 5-year and 10-year investment
horizons. The ranking, based on four performance measures, corresponds to Lipper rating for the
lowest rated and leader funds, but not for the three- and four-key rated funds. Further, there is a
significant difference in the performance of the five-key, four-key and three-key rated funds which
outperform the lowest rated funds, indicating that Lipper rating is able to distinguish superior and
inferior unit trust funds.
Research limitations/implications – Some of the limitations in this study are that the indexes
could be self-constructed. The existing index might not represent the asset allocation of the funds
concerned. Additional variables might have to be considered when examining fund performance as they
should correspond to the characteristics of a fund.
Practical implications – The results indicate that Lipper rating classification could identify the
highest and lowest performing funds. Therefore, investors could use this rating to make informed
investment decisions without undertaking time-consuming analysis to ascertain the good- and
bad-quality funds in the market.
Social implications – The findings of this study could be used by the academia as another source of
reference to enhance their understanding of the applicability of Lipper rating for unit trust funds in an
emerging market.
Originality/value – The contribution of this study is that it analyzes the effectiveness and capability
of Lipper Leader rating in identifying quality funds in the context of an emerging market. Performance
comparison between Lipper Leader rating and methods used in the portfolio theory bridges the
theory-practice gap between practitioners and academics. To date, there have been no attempts to study
and compare the ratings of advisory firms with theoretical performance measures, particularly in the
context of Malaysia