A short introduction on the up- and down-capture ratio

13 mei 2015

Some metrics can help shareholders determine how a fund, historically, has fared in periods of market strength and weakness. The upside and downside capture ratio is such a metric. Upside (downside) capture ratios for funds are calculated by taking the fund’s monthly return during months when the benchmark had a positive (negative) return and dividing it by the benchmark return during that same month.

When an investor expects markets to fall, he should probably bias his selection toward funds with a low down-capture ratio. Following this approach – and assuming that the funds’ investment style does not change over time - his investment should drop less severely during the downturn, while he should still be able to reap some upside in case of an (in this case unexpected) upturn.

When an investor thinks the stock market will rise, he should probably be on the lookout for a fund that has a high up-capture ratio – as these funds should be well positioned to reap the full benefits of bull markets.

We calculated both metrics for both Vector funds (Navigator and Flexible), and for an average of 2000 global Equity funds. The benchmark we used is the MSCI ACWI NR in Euro (which has an up- and down-side capture ratio of 100%, by definition). We calculated the up and down capture ratio over the last 3 years, using monthly returns:
 

 
The average global equity fund^(*) only captures 92% of returns when markets are rising, and misses out on the remaining 8% of 'good' returns. Unfortunately, when markets fall, the average fund tends to capture a larger share (95%) of the bad returns. Consequently, the average (global) equity fund has underperformed the market over the last 3 years.

Vector Navigator has a 3 year up-capture ratio of 120% and a downside capture ratio of 78%, showing that the fund combines the best of two worlds: high upwards potential and (relatively) low downside risk.

Over the same 3 year horizon, Vector Flexible’s downward capture ratio is as low as 55%, while its upward capture ratio is still 84%. Both funds clearly do what they’re designed to do: have a better performance than most comparable funds during bear markets – without giving it all back in bull markets.

(*) Morningstar Category: Large-Cap Blend Global Equity