What it means
Fund managers are judged against a benchmark, which is a reference index such as a broad stock market index. The up-market capture ratio isolates the periods when the benchmark rose and asks how the fund performed in those periods compared with the benchmark.
It gives a clear picture of how much of the upside the manager participates in. A ratio of 110 means the fund gained 10% more than the benchmark during rising periods, while a ratio of 85 means it gained only 85% as much.
Neither number is good or bad by itself. A fund that deliberately holds cash or defensive stocks will usually lag in strong markets, and that may be exactly what its investors want.
The ratio is meant to be read together with the down-market capture ratio, which does the same for periods when the benchmark fell. A manager with high up capture and low down capture is adding value, because the fund rises with the market but falls less.
A fund that captures 100% of both gains and losses is simply following the benchmark. To calculate it, the analyst divides the data into periods, usually months, and picks those in which the benchmark return was positive.
The fund's return over those periods is then divided by the benchmark's return over the same periods. Using longer data series gives more stable results, because a few unusual months can distort a short sample.
There are some cautions. The ratio is backward-looking, it depends on the benchmark chosen, and it can be affected by fees, which reduce fund returns in every period.
Investors should treat it as one tool for comparing managers, together with risk measures and the fund's stated strategy. Reporting platforms usually quote the ratio over one, three and five years.
Differences between those windows show whether a manager's behaviour has been consistent or whether one strong or weak period is driving the number. Consistency across windows is a better sign of skill than a single high reading.
In practice
Real-world examples.
Example
A pension fund trustee compares two equity managers. Manager A has an up-market capture ratio of 105 and a down-market ratio of 100, while Manager B has 95 and 80. She prefers Manager B because it gives up little upside and avoids much of the downside.
Example
A financial adviser explains to a cautious client that a low-volatility fund has an up capture of 75. The client sees why the fund lagged in a strong year, and agrees that it fits her goal of avoiding large falls.
Example
An analyst at a family office reviews a growth fund with an up capture of 125. He notes that the fund's down capture is 130 as well. The fund magnifies the market in both directions, so he judges it a higher-risk choice.
Formula
Calculation
Up-market capture ratio = (fund return in benchmark-up periods / benchmark return in benchmark-up periods) x 100
Suppose that over three years, the months in which the benchmark rose produced a combined benchmark return of 40%. In the same months the fund returned 34%. Ratio = (34 / 40) x 100 = 0.85 x 100 = 85. The fund captured 85% of the benchmark's gains. If the down-market capture ratio were 70, the fund would have lost only 70% as much as the benchmark in falling months, which could justify the lower upside.Case study
Seen in the real world.
Bluewater Asset Management is an illustrative, fictional firm marketing a defensive equity fund. A prospective client complained that the fund returned 12% in a rising period when the benchmark returned 20%.
The head of client reporting showed the up-market capture ratio of 60 and the down-market capture ratio of 50. In a later falling period, the benchmark lost 10% while the fund lost only 5%.
The client accepted that the fund was working as designed. The illustrative lesson is that a low up-market capture ratio is a cost of defensive investing, and it makes sense only when the down-market ratio is lower still.
Watch out
Common mistakes.
- Treating a ratio above 100 as automatically good, when the fund may also have fallen further in down markets.
- Using too short a period, when a handful of unusual months can distort the figure.
- Comparing funds against different benchmarks, which makes the ratios meaningless to compare.
Questions
People also ask.
What is a good up-market capture ratio?
It depends on the fund's aim, but a value near or above 100 combined with a down-market ratio below 100 is generally considered attractive.
How is it different from alpha?
Alpha measures risk-adjusted outperformance in a single figure, while capture ratios show separately how the fund behaved in rising and falling markets.
Does the ratio include fees?
It uses the fund's reported returns, so if these are net of fees the ratio reflects them, and the investor should check which basis is used.
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