The down-market capture ratio measures how well an investment fares during bear markets. Barring a short fund or other counter-cyclical investment, it's reasonable to expect that any investment would lose value when its market drops. Using the down-market capture ratio lets you see how much the investment drops relative to the market's loss so that you can make a better comparison.
Single-Period Down-Market Capture
For a single period, calculating the down-market capture ratio is a straightforward division problem. You calculate the capture ratio by dividing the investment's returns over that period by the market's returns and by multiplying the resulting quotient by 100 to convert it to a percentage. For instance, if a fund dropped 10 percent when the market dropped 13 percent, you would divide 10 into 13 to get 0.769, then multiply it by 100 to get a 76.9 percent down-market capture ratio.
Multiple-Period Down-Market Capture
Calculating the process over multiple periods is a bit more complicated since the equation uses elementary calculus. To do it, you would add up, compound and then annualize all of the down market returns for an investment, and divide it into an annualized and compounded sum for the market as a whole during a down market. Some investment research sources and investment companies calculate and disclose capture ratios, saving you from having to calculate them.
The Right Ratio
Generally, a down-market capture ratio of less than 100 percent is a good sign. It means that the investment loses less money in down times than the overall market. A ratio of 100 percent or greater means that the investment amplifies downward swings. For instance, if the market lost 10 percent of its value, a fund with a 130 percent down-market capture ratio would lose 13 percent of its value, while one with a 60 percent ratio would lose just 6 percent.
Ups and Downs
The down-market capture ratio can be a more useful tool when looked at in conjunction with its opposite -- the up-market capture ratio. Dividing the down-market into the up-market ratio gives the overall capture ratio, which indicates how a fund performs. For instance, a 105 percent down-market capture ratio might not seem attractive, since it means that the investment does worse than the market as a whole in down times. However, if the same investment also has a 130 percent up-market ratio, it means that it significantly outperforms the market in good times. Dividing the 105 into the 130 gives an overall ratio of 1.24, which means that the fund's performance is, overall, positive.
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