Down-Market Capture Ratio

  

Investment managers have a singular goal: make money. But it doesn't always happen. Sometimes it's because the manager put all the firm's money into Fyre Festival 2. Other times, the manager is invested in the market when the entire market goes down, and she shoulda held cash. The general market drops and the fund loses money along with everyone else.

In those times, when the fund loses money because the general market is down, how do you know whether a fund manager did a good job or not? They lost money. But everyone lost money.

You need some kind of benchmark. Enter the Down-Market Capture index. It provides a way to measure the performance of a fund manager when the overall market is down. It's a kind of relative strength index or relative performance metric.

Every fund has a benchmark index. You run a fund that invests in technology stocks. To figure out whether or not you're doing a good job, you compare your performance to an index fund that tracks the overall technology space, something like the Nasdaq-100 Technology Sector Index. (And you had better beat that number consistently, because index funds are cheap for the investor...like 0.3% or so a year to manage versus a mutual fund paying your fat fee of 1% or more a year.)

To see how you did, you compare how your fund performed compared to the performance of the Nasdaq-100 Tech index. If the Nasdaq-100 fell 7% and your fund only fell 5%, you did all right. If your fund fell 10%, then maybe you should consider going back to law school.

Here's how you figure out the Down-Market Capture Index. Take your performance and the performance of the benchmark. Figure out the ratio between the two. Multiply the answer by 100. If the answer is above 100, you beat the market. If the answer is below 100, you'll need to fix your performance, or your clients will start looking elsewhere.

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And finance allah shmoop what's the difference between mutual funds

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and index funds The answer this guy or well this

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team what do they do They manage the mutual fund

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mutually together You know what nemo They make bets on

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apple and amazon in crotchless tuxedo pants Dot com will

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these bets or into teligent investments In the parlance of

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the industry our elements oven actively managed fund The mutual

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fund is active in that it buys and sells hoping

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to be smarter than the market and find areas you

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know where they're inefficiencies where investors are throwing out the

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baby with the bath water so that they buy the

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shares here a twelve bucks and hope to sell them

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if they hit thirty bucks in two years when the

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new products get released and people are going absolutely bonkers

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for self velcro ing neckties or whatever and index generally

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stands pat on the hand It's dealt throughout the course

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of the year making only small tweaks to invested amount

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so that the fund itself conforms to the structure or

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rules it set out when it was created But there

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are a few vital and insidious differences that should make

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investors today very wary about investing in mutual funds or

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any actively managed fund When mutual funds first became popular

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the investing marketplace was kind of the wild wild west

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that was the nineteen fifties and sixties and a savvy

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fund manager could beat the market by five and even

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twenty percent per year year over year It was kind

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of a golden age of mutual funds and money flowed

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into them But like all good things this market wrinkle

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easy winds and the investing world had to come to

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an end Why competition when there were only a few

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mutual funds out there and a few private investors it

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was relatively easy to identify baby bathwater things you know

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diamonds in the rough Today there are literally thousands of

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mutual funds With such massive competition performance relative to the

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market has lagged dramatic In fact over a typical seven

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to ten year holding period only a very small handful

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of mutual funds beat the typical index fund investing in

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the same or analogous areas of stocks or bonds It's

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like one in twenty ever really beat the market and

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it gets worse Mutual funds charge relatively large fees compared

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With index funds whereas a typical index fund might charge

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twenty basis points to manage your money that is twenty

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cents for every hundred bucks you have with them for

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year The analogous mutual fund My charge One percent or

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more that's five times surprise for demonstrably no better investment

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results and wait It gets even worse Mutual funds trade

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stocks and bonds and other securities index funds rarely trade

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or if they do it's a very small amount of

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trading around the margin keeping index in compliance with its

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legal charter But many mutual funds have turn over the

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apple variety of like fifty eighty or even one hundred

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percent Turn over means that a fund has sold the

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stock to realize a taxable gain You know book a

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profit by taking cash from selling the stock or to

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realize a loss sometimes as well we'll each time of

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fund transact It pays a commission to our friendly excellent

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golf skilled brokers but more painful to most investors is

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that in transacting the fund realizes taxable game So what

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does that mean Well here's the math If your mutual

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fund is up twelve percent given year when the market's

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up ten percent it would be an absolute top of

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the pyramid performance here For the fun of beating the

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market by two hundred basis points would likely mean that

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mutual fund was in the top forty right up there

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with rina's latest it single So what is that awesome

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performance after tax for the mutual fund Well if the

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had turnover of about sixty percent of its assets and

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half of those sales would get ordinary income tax treatment

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think high rates of something like forty percent with federal

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and state taxes combined for most and long term gain

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of twenty percent for the rest Well the wealthy pay

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higher taxes so we're rounding down the numbers here even

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being conservative So if half of the sixty percent or

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thirty percent of the gain of twelve percent which is

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around four percent his tax at forty percent then take

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an after tax net result number Then after another thirty

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percent tax at the long term gain rate of twenty

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percent you'd have take away another point six percent so

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in total you'd have to subtract one point six plus

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point six or two point two percent from the twelve

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percent humongous rock star year to net nine point eight

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a huge performance top two percent fun has results Not

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much better and or maybe worse than just a basic

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