Up-Market Capture Ratio: Understanding and Calculation

What Is the Up-Market Capture Ratio?

The up-market capture ratio is a statistical measure of an investment manager’s performance in up-markets. It evaluates how well an investment manager performed relative to an index when that index has risen.

It can be compared with the down-market capture ratio.

Key Takeaways

• The up-market capture ratio measures an investment manager’s performance during bull markets.
• The ratio is calculated by comparing the manager’s returns with that of a benchmark index.
• Investors and analysts should consider both the up- and down-market capture ratios to understand a manager’s performance.

Calculating the Up-Market Capture Ratio

The up-market capture ratio is calculated by dividing the manager’s returns by the returns of the index during the up-market and multiplying that factor by 100.

Up Down − MCR = MR IR × 100 where: MCR = market capture ratio MR = manager’s returns IR = index returns

Understanding the Up-Market Capture Ratio

An investment manager with an up-market ratio greater than 100 has outperformed the index during the up-market. For example, an up-market capture ratio of 120 indicates that the manager outperformed the market by 20%. Many analysts use this calculation in their assessments of investment managers.

If an investment mandate requires meeting or exceeding a benchmark index’s rate of return, the up-market capture ratio helps identify managers who do so. This is important for investors who use an active investment strategy and consider relative returns.

Special Considerations

The up-market capture ratio is one of many indicators used to find good money managers. Because it focuses on upside movements and doesn’t account for downside moves, some critics argue that it encourages excessive risk-taking. However, when combined with other performance indicators, the up-market capture ratio provides valuable investment insight.

When evaluating an investment manager, it is best to consider the down-market capture ratio as well. This ratio is calculated in the same way using down-market returns. Comparing both ratios can reveal if a manager with a large down-market ratio or poor up-market ratio still outperforms the market.

The market capture ratios of passive index funds should be close to 100%.

Example of Using the Up-Market Capture Ratio

If the down-market ratio is 110 but the up-market ratio is 140, then the manager compensates for poor down-market performance with strong up-market performance.

You can quantify this by dividing the up-market ratio by the down-market ratio to get the overall capture ratio. In our example, dividing 140 by 110 gives an overall capture ratio of 1.27, indicating that up-market performance offsets down-market performance.

The same is true if the manager performs better in down-markets than up-markets. If the up-market ratio is only 90 but the down-market ratio is 70, then the overall capture ratio is 1.29, indicating that the manager outperforms the market overall.