Correlation between Mutual Fund Returns & Capture Ratios

Published: April 26, 2016 at 7:39 am

The correlation between mutual fund returns and the upside/downside capture ratios is discussed using Mid-cap mutual funds. It is no secret that I am a fan of the downside capture as a simple means of measuring downside protection, selecting and reviewing mutual funds.

In this  post, the recently obtained downside Capture Ratio of all Mid-cap Equity Mutual Funds is  used for analysis.

Downside capture refers to the amount of benchmark losses captured by the fund. That is, a fund which has only captured 70% of benchmark losses is considered better than a fund which has captured 80% of losses. This ratio (expressed as a percentage) is known as downside capture. Lower the downside capture the better.

Upside capture refers to the amount of benchmark gains captured by the fund. That is, a fund which has captured 110% of benchmark gains is considered better than a fund which has captured 90% of gains. This ratio (expressed as a percentage) is known as upside capture. Higher the upside capture the better.

Capture ratio = upside capture/downside capture. A value greater than 1 is considered ‘good’ as it implies high upside and low downside.


The reason I like the downside capture or its brother the upside capture  is because they are simple to understand and do not have the limitations associated with other popular risk-adjuted metrics like alpha, Sharpe ratio, Sortino ratio, standard deviation etc.

More about the downside capture and  upside capture can be found in the following posts:

Nine year Returns 

downside-vs-return- A9

Unfortunately, the analyzer could only calculate for a handful of funds over this duration. Although there is a general sloping trend from left to right, there is also a considerable spread in returns for a given downside capture or vice versa.

Higher the capture ratio, higher the return is the ‘general trend’ with the spread as mentioned above. Notice that one fund is an outlier. This has an unusually low upside capture which makes the capture ratio small.Will have to investigate further into this.

It is important to note that each capture ratio is calculated with reference to a different benchmark (that of the funds). I believe this is the main reason for the scatter.

Eight-year returns

downside-vs-return- A8Sometimes, when the benchmark has moved down, the fund may move up. The  downside capture would then become negative (as it is a ratio). This is quite normal and a ‘good thing’.

The spread in downside is much higher compared to the capture ratio. Aside from the presence of outliers, the capture ratio does have better correlation with returns than just the downside capture.

Data for other durations can be found in this slideshow. Data over short durations is included only for completeness. Not much can be made out of these.

 Impression: More data points across categories is necessary before ‘concluding’ anything. With what we have now,
1) The capture ratio correlates better with returns than just the downside protection.
A fund  with low downside capture (lower losses than benchmark) and high upside capture (higher gains than benchmark) can be expected to provide ‘good’ returns. The capture ratio (=upside/downside) seems to reasonably bring out this information.
2) However, low capture ratios  with high returns show up as outliers.
3) Low downside capture does not guarantee returns.
4) As always maintained, it is better to shortlist ‘good performers’ as defined by above category average performance or top 10 over multiple durations first and then look for consistent downside protection in the shortlist.
5) Above average capture ratios, and above average returns is another way to screen.
Mutual-fund-screener-4
Analyze individual funds with the Mutual Fund Downside Protection Calculator.
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