An introduction to Downside and Upside Capture Ratios

Published: June 22, 2017 at 10:52 am

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Readers may be aware that I often use rolling returns, where anualized return is calculated between two dates and the calculation dates are shifted to the next possible business day.  I have developed a rolling downside and upside capture calculator and before publishing it, would like to discuss what they are in simple terms.

A rolling return calculates every possible return between two dates and each month I publish 3Y, 5Y and 7Y returns bet April 20006 to the end of last month. You can refer to last months data here: Monthly mutual fund screeners The idea is to find out how consistent the fund has been in beating its benchmark. This is a rolling reward calculator.

I had earlier published a rolling risk calculator: Evaluating Volatility in Returns – a rolling standard deviation tool. Since I have fallen out of love with the standard deviation and its cousins – the average, alpha, beta, gamma etc. – I wanted to make an alternative rolling risk tool.

The best way to understand upside can downside capture is via an example.

Consider the following data set for a fund and index.  The monthly NAV and price data is shown along with the monthly return, which is just the absolute difference or the percentage gain or loss.

Now I take funds monthly returns can compute annualized return or cagr in the following wayIf m1, m2, m3, ….. are monthly returns over a year, then

(1+CAGR) = (1+m1) x (1+ m2) x (1+ m3)x…..

From which the CAGR (compounded annualized growth rate or annualized return) = 8.16% as shown above.

With this information in mind, let find tabulate the fund and index monthly returns when the index monthly return was positive (>0) and when it was zero or less (<=0)

First observe the two rightmost columns. There were only two instances when the index monthly returns were <=0. Correspondingly, the fund returns were also negative.

In one instance, the index fell by -14.75% and the fund only -5.17%. In another instance, the index fell by -12.44% and the fund by -13.39%.

Similarly, the two adjacent columns show fund and index returns when index returns were positive.

Suppose I take the fund returns when the index returns were positive and calculate CAGR.

The calculation is identical to the standard CAGR (shown above), but the monthly returns when the index returns were <= 0 are left out.

The 31.68% is known as Upside-CAGR-FUND.

Similarly, we can calculate an Upside-CAGR-Index using only positive index monthly returns.

we can extend the calculation to obtain a Downside-CAGR-Fund and Downside-CAGR-Index.

Upside Capture Ratio

Upside capture ratio  = Upside-CAGR-Fund/Upside-CAGR-Index.

It tells you “how much of the index gains the fund captured”.  This should be higher than 1 or 100% – whenever the index gives +ve returns, we expect the fund to provide higher +ve returns.

Downside Capture Ratio

Downside capture ratio  = Downside-CAGR-Fund/Downside-CAGR-Index.

It tells you “how much of the index losses the fund captured”.  This should be less than 1 or 100% – whenever the index falls, we expect the fund to fall lower.

Capture Ratio

Capture Ratio = Upside Capture/Downside Capture. (should be above or close to 1 o 100%).

Now the goal (well, mine anyway) is to look for a consistently low downside capture. This means the fund typically had lesser losses than the index. My experience suggests that it is not possible to expect a consistently high upside capture, but more on this later.

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Rolling Upside and Downside Captures

Now imagine these ratios calculated on a rolling basis. For example,

first data set = Apr 2006 to Apr 2007 (for 1Y calculations

second data set = May 2006 to May 2007

third data = June 2006 to June 2007

and so on until we exhaust all the data that we have.

This is an example of a 5Y rolling capture ratio data set for Quantum Long Term Equity vs Nifty 50 (TRI).

Do you like what you see? Can you interpret this graph? Will you invest in such a fund?

To be continued ……


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  1. Wonderful 101 on how upside and downside capture ratios are created. Thanks, Pattu.

    On the question – what do I interpret:
    1. For starters, after the first few data points – the Upside/ Downside Capture Ratio has been always =1 or marginally above it. That means for a very long time the fund has been providing slightly better than market returns.
    2. The downside capture ratio has been consistently <1 after the early period. This means that invariably you have been losing less than the market always.

    Conclusion – good for some one who's conservative. i.e. always wanting to have losses less than the market, and at least get a market return.

    1. 🙂 That is precisely the kind of insight I am looking for. Will run this for all funds and get a kind of consistency score. Thank you.

  2. Hi Sir,

    How do I interpret these results from the example provided above. Downside Capture and upside Capture of fund, both are lesser than Downside capture and Upside capture of Index.

    Infact Annual CAGR of both Index and fund are 8.16%. Does that mean for the same Annual CAGR, Since I have lesser Downside capture compared to index(implies lesser Risk), I should invest in such fund.

    In that case what is the significance of Upside capture ratio.


  3. Manoj:
    You are right in your observation that both give you 8.16% – The market and this fund. Let me give you an analogy to put it in perspective.
    1. One person drives on the road, the way it it – some one brakes over the pot-holes, and then speeds on the straight road. He is ok to drive over the potholes as long as he can get the opportunity to drive fast. He takes say 2 hours to complete the journey.
    2. The second person is a careful person – He drives slowly, minimizes the pot-holes on which he drives. He is happy to not zip, as long as he does not have to keep braking on the potholes. He also takes 2 hours to complete the journey.

    So, which one are you?

    If the road has less potholes, the first guy will go faster.
    If the road has too many potholes, the second guy will steadily reach, without being unduly bothered by the potholes.

    Under certain conditions – like this one, both reach in the same time!

  4. Thanks Srini, for the reply. I was actually trying get the significance of the upside and downside independently. Hence I compared to overall return.

    But looks like upside and downside should not be considered separately instead should be gauged together.

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