What it means
Many investors care as much about losing less in a downturn as about gaining more in a rally. The down market capture ratio isolates the periods when the benchmark, such as a broad stock index, produced a negative return.
It then compares the fund's performance in those same periods with the benchmark's. A fund with a ratio of 85% lost, on average, 85 cents for every dollar the benchmark lost in down periods.
A fund with a ratio of 110% fell more than the benchmark, which suggests it takes more risk or holds more volatile shares. Lower is better, because it means better protection.
The ratio is usually read alongside the up market capture ratio, which does the same job for rising periods. An ideal fund has a high up capture and a low down capture, meaning it participates in gains but cushions losses.
If both are around 100%, the manager is behaving much like the index. Calculation requires a consistent series of returns, such as monthly figures over three or five years, and a suitable benchmark.
Choosing the wrong benchmark can make a fund look better or worse than it really is. The result also depends on the period chosen, so it is wise to look at several time frames.
The measure has limits. Past behaviour does not guarantee future results, and a short history with only a few down months can be misleading.
It also ignores fees, taxes and the size of individual losses, so it should be treated as one of several tools for judging risk.
In practice
Real-world examples.
Example
A pension consultant compares two equity managers over five years. Manager A has a down capture of 88% and Manager B has 104%. She recommends Manager A for a client who is close to retirement and cannot tolerate large losses.
Example
A financial adviser explains to a client why a defensive fund lagged during a strong rally but held up in a downturn. He shows that the fund has an up capture of 70% and a down capture of 60%. The client accepts the trade-off for a smoother ride.
Example
A university endowment committee reviews its global equity fund. The fund's down capture of 95% is only slightly better than the benchmark, despite high fees. The committee asks the manager to explain what value it adds in falling markets.
Formula
Calculation
Down market capture ratio = (Fund's average return in down benchmark periods / Benchmark's average return in those periods) x 100
Worked example: over a year, the benchmark fell in four months, with returns of -2%, -4%, -6% and -4%. The fund returned -1.5%, -3.5%, -5% and -3% in the same four months.
Step 1: Benchmark average = (-2% - 4% - 6% - 4%) / 4 = -16% / 4 = -4%
Step 2: Fund average = (-1.5% - 3.5% - 5% - 3%) / 4 = -13% / 4 = -3.25%
Step 3: Ratio = (-3.25% / -4%) x 100 = 81.25%
The fund captured about 81% of the benchmark's losses, which means it cushioned the downside by about 19%.Case study
Seen in the real world.
Bridgewater Lane Capital is an illustrative, fictional asset manager that launched two funds with different styles. The Steady Income Fund focused on stable dividend payers, and the Momentum Growth Fund invested in fast-rising companies.
After three years, the Steady Income Fund had an up capture of 78% and a down capture of 65%, while the Momentum Growth Fund had an up capture of 125% and a down capture of 130%. In the worst quarter, the benchmark fell 10%, the steady fund lost about 6.5% and the growth fund lost about 13%.
The firm's advisers used these figures to match each fund to client needs. Retired clients were pointed to the steady fund, and younger clients with long horizons could choose the growth fund. The illustrative lesson is that the ratio makes the risk trade-off easy to see.
Watch out
Common mistakes.
- Thinking a higher ratio is better, when for down capture a lower number means smaller losses.
- Using the ratio without the up market capture ratio, when a low down capture may simply reflect a fund that also misses gains.
- Comparing against an inappropriate benchmark, when this distorts the result.
Questions
People also ask.
What is a good down market capture ratio?
A ratio below 100% is generally good because it means the fund lost less than the benchmark, and the lower the number, the stronger the downside protection.
How is it different from beta?
Beta measures sensitivity to all market moves, whereas down capture looks only at periods when the benchmark fell.
What time period should I use?
Use several periods, such as three and five years, and consistent frequency such as monthly returns, so that one unusual episode does not dominate.
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