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.
Related or Semi-related Video
Finance: How Do You Judge the Performanc...132 Views
finance a la shmoop. how do you judge the performance of an index fund? very
carefully. actually performance means something very different when it comes
to an index fund versus an actively managed fund. in an index fund the
manager doesn't really do anything per se other than rebalance the indices so [man sleeps at a desk]
that they conform to whatever the product was that you bought in the first
place. for example a technology index fund might claim that 12% of its
holdings will have wireless telecommunications related stocks as a
target, but never less than 10% and never more than 15% .and in most cases the
actual stocks that go in the fund are identified beforehand like before the [man smiles at camera]
funds actually really launched. and the relative weightings of those investments
is also predetermined .ie the fund might target having three percent of its total
as shares in Verizon. but if Verizon suddenly does extremely well and doubles
in price in a short period of time well the index fund might have to sell
shares of that stock so that it's weighted holding amount won't pierce the
maximum weighting of 15%. but all this relates to the composition of the fund [pie chart]
not necessarily the performance. since an index fund is a reflection of a given
area like these examples they conform to a general theme, like the Vanguard total
stock market index. the broadest based reflection of the overall market. like
the S&P 500 plus Nasdaq plus the New York Stock Exchange indices or another
one might be the Vanguard small cap Value Index, largely companies under a
few billion bucks in market cap which trade at relatively low price to [value index listed]
earnings ratios ie they are value stocks rather than say growth stocks. all right
next one might be the Vanguard emerging markets stock index. that one's all about
third world countries trying to become second worlders how's that Nigerian
oil exchange looking? or what about investing in Vietnam these days? the
Napalm is mostly washed away by now. and then move it on. yep there's the Vanguard [sink with the water on]
intermediate term bond index, and yes there are bond index funds as well.
intermediate just means that the bonds in this set of bonds mostly come due
within about five years or so. the bottom line is that an index fund
isn't really a managed fund. it's just a reflection of whatever group of stocks
or bonds it is supposed to reflect. so if an index performs poorly, all of the [man holds stock]
fault lies in the one who chose that particular index fund, not the manager of
the fund because well there basically wasn't one, so if your fund as poorly and
you want to scream at the idiot moron financial manager who screwed up your
retirement by picking a bad investment vehicle ,well go find a mirror. [woman grimaces and cries]
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