By Gunjan Banati
We believe capture ratios are a particularly good way to measure returns during full market cycles, which include both up markets and down markets.
Gunjan Banati, Fund Research and Analytics, shares her perspective on how capture ratios illustrate fund performance over market cycles.
"We think a particularly good way to measure how a fund tackles market cycles is to categorize the performance into up markets and down markets, and the capture ratio is a really good way to do that.
Up capture ratios evaluate the fundâ€™s performance against the benchmark at times when the benchmark return is positive, while downside capture compares the performance of the fund when periods of the benchmark are negative. One of the great things about looking at up and down capture ratios is when you combine them you can calculate the capture ratio. Thatâ€™s up-capture divided by down-capture. This shows the net overall relative performance of the fund versus the benchmark."
"We think the most effective way to use capture ratios is to evaluate them over longer time periods. We choose to do this because it encompasses multiple market cycles in your analysis. So when we evaluate our funds we calculate capture ratios over three-, five-, and 10-year rolling periods over the last 15 years.
We are often asked by advisors how we use capture ratios. â€œWhatâ€™s the most effective way to analyze these results?â€, and capture ratios are a great tool to evaluate whether a fund is more aggressive or more defensive in nature. It can also help you in building portfolios. It helps you more effectively pair funds together, and in addition if you use capture ratios you can make tactical allocations based on your outlook for future market conditions.
So capture ratio is calculated by taking your upside capture and dividing it by downside capture. This gives you the fundâ€™s net overall relative performance for the period.
Capture ratios may seem complex at first glance but actually theyâ€™re really effective tool for you to evaluate your historical investment experience dividing it into up markets and down markets."
Important Disclosure Information
The thoughts and opinions expressed in the video are solely those of the person speaking, and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.
This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Micro-cap, small-cap, and mid-cap stocks may involve considerably more risk than investing in larger-cap stocks. (Please see â€œPrimary Risks for Fund Investorsâ€ in the prospectus.) Capture Ratio is a performance gauge used in both up phases (upside capture) and down phases (downside capture). It is a statistical measure of a portfolioâ€™s overall performance in up and down markets. The upside capture ratio is used to evaluate how well a portfolio performed relative to its index during periods when that index has risen, and the downside capture ratio is used to evaluate how well a portfolio performed relative to its index during periods when that index has declined.