NEW YORK -- Fund companies already are analyzing what Lipper Inc.'s new mutual fund classification system will mean to their bottom line.
The change could hit some portfolio managers in the wallet, because most of the industry bases portfolio manager compensation on some slice of Lipper's performance data.
Lipper's old categories often pitted funds of various styles and capitalizations against each other.
The new system is based on the predominant market cap of portfolio holdings and adds an element of risk measurement.
Funds are divided into five tiers. Those with at least 75% of assets (on a three-year weighted basis) invested in a target market-cap range are placed in the new, narrower classifications: large cap (market cap minimum of $7.6 billion); midcap ($1.5 billion up to $7.6 billion); small cap ($300 million up to $1.5 billion); and microcap (less than $300 million).
A fifth class for broader capitalizations -- flex cap -- will have the largest number of funds, 1,465 of a total of 5,700.
Lipper's old cap minimum test was 50% of holdings.
The new system will assign funds to five categories for risk measurement -- aggressive, growth, general, value and income.
Managers aren't expected to make many changes in the management of their portfolios to stay within Lipper's new categories.
"I find it hard to believe that managers will really tune things so they end up in a Lipper category they really want to be in," said Kenneth D. Fuller, vice president and investment performance analyst at T. Rowe Price in Baltimore.
As for Lipper's motivations, Andrew Guillette, a consultant at Cerulli Associates Inc., Boston, said, "I think Lipper was pushed and cajoled into this from the broker community. . . . Lipper is on a lot of broker systems at some level and the brokers needed some way to measure style purity . . ."
J. Mark Naber, managing director of consulting at Optima Group Inc., Fairfield, Conn., said the mutual fund industry had been well aware of the limitations of Lipper's performance classifications. "For example, you used to see a huge amount of mutual fund advertising using Lipper data. That is gone."
A. Michael Lipper, chairman, said the classification system is "a work in progress" and probably will undergo changes in the six months before it completely replaces the old system.
For portfolio managers, the new system will make it easier for them to justify their compensation based on narrower peer groups.
"I think the change will actually enhance usage for compensation calculations -- it'll be much easier. A new comparison. But everyone will hate it. No one likes change," Mr. Naber said.
Mr. Guillette from Cerulli said portfolio managers have a vested interest in getting their senior management to allow them to be compared to the smallest possible universe of peer funds. A portfolio manager's compensation is directly tied to how the performance of his or her fund compared to the performance of peer funds, the average performance of that peer group and, usually, to an index return.
Said T. Rowe Price's Mr. Fuller: "I do think it will lead fund company management to take a further evaluation of the most appropriate peer groups for their funds internally for compensation purposes."
