The first will not be last nor the last first but there will be radical changes in mutual fund rankings, at least according to Lipper Analytical, starting this summer.

When Lipper Analytical changes how it classifies mutual funds starting July 1, many funds that now hold lofty positions in their current class will lose stature and the rankings of others who lagged in their categories will improve, according to a report issued by Financial Research Corp., a fund research firm based in Boston.

At the beginning of July, existing classifications such as Growth, Growth & Income, Equity Income, Small-Cap, Capital Appreciation, Mid-Cap and Micro-Cap will be replaced with more than 20 new classifications based on portfolio characteristics and performance attributes.

Lipper will keep all the capitalization categories and add a new one- Flex-Cap, for funds without a market cap restriction. It will combine those categories with investment styles such as aggressive (portfolios with stocks that have high price-to-earnings ratios, price to book values and earnings growth), income (portfolios that generate high incomes) and general (funds containing stocks with average price-to-earnings or price-to-book ratios).

The changes should make it easier for intermediaries and investors to evaluate funds and were made in response to requests from those constituencies, the report said. On the other hand, among the losers when the reclassification takes effect will be some fund managers.

"Perhaps those with the most at stake are the fund managers, whose bonuses are often based, in part, on Lipper rankings," wrote Chris J. Brown, the author of the report. "These changes might fuel a higher turnover rate among portfolio managers shifting allegiances."

Under the existing categories, 38 percent of the industry's $1.9 trillion in long-term assets are in two categories, Growth and Growth & Income, and 69 percent of the assets are in the top 10 objectives, the report said. Assets will be more widely distributed and any given category will hold fewer assets under the new system. The largest categories will be Large-Cap Value with $415 billion in assets or 11 percent of the total, Large-Cap General with $276 billion or eight percent, and Large-Cap Growth with $221 billion or six percent. The top 10 objectives will account for 56 percent of the industry's long-term assets.

For some funds, the re-classification will mean moving from middling to top rankings. One such fund cited by the report was the Strong Common Stock Fund, which is in the bottom quartile in one-, three- and five-year performance in its current classification as a Growth fund. Under its new Mid-Cap Growth classification, Strong would jump into the top quartile in one- and five-year performance and would be above average in three-year performance.

Other funds will see less favorable results. After the conversion, very few large-cap funds will move up in performance rankings, while more than half will lose ground, the report said. Based on year-end 1998 numbers, eight of the top 10 largest funds would suffer a decline in rank in at least one of four performance periods- one-, three-, five- or 10-years. Three of the funds- American Funds Washington Mutual Investors, Vanguard Windsor II and American Century Ultra would drop in their quartile rankings in three periods. And the Janus Fund would drop in four periods.

"There will be a leveling of the playing field among competing funds, as managers will be increasingly compelled to remain true [to] the fund's investment style," Brown wrote.

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