One of the most useful measurements investors and advisors can use when assessing a manager's past performance is up capture and down capture ratios. These measurements can tell a lot about how a manager has a generated their performance and can indicate whether they are a suitable investment for your portfolios. Up and down capture ratios also are a great indicator of whether a fund is delivering on its philosophy and process.

The up capture ratio shows the percentage of market gains the fund has captured in the months that the market provided positive returns. The higher the up capture ratio the better the manager has done when the market has been doing well. Ultimately, you should expect a long only fund to have an up capture ratio of greater than 100% indicating that the fund performed better than the market in the months the market was positive.

As you would expect the down capture ratio shows the percentage of market losses the fund captured during the months when the market lost money. The lower the down capture the better the fund has performed when markets are down. You would expect a long/short fund to have a down capture ratio significantly lower than 100%, indicating that the fund has protected against the downside.

Isolating up and down capture data provides interesting insights into how active funds have delivered returns over the past 3 and 5 years.

Isolating Global Equity Funds including Long Only and Long/Short Funds over 3 years, to the end of May 2021, the market was positive for 23 months and negative for 13 months:

• The best performer in the peer group had the highest up capture (151%) and the 5^th lowest down capture (57%).
• The 14 funds in the top quintile for performance were all 1^st and 2^nd quintile for up capture and 1^st, 2^nd or 3^rd quintile for down capture.
• As expected, long/short funds had a lower average up capture ratio of 82%. But surprisingly they produced an average down capture of 86%. Of the 17 funds in the long/short peer group, 6 funds had a down capture of greater than 100% and didn't protect on the downside.

Looking at a 5-year time horizon where the market was up for 37 months and down for 23 months:

• The best performer in the peer group had the 2^nd highest up capture (148%) and the 6^th lowest down capture (70%).
• Long only funds proved that they can protect against down markets. The average down capture for long only funds was 87% and only 8 of the 43 funds in the peer group had a down capture greater than 100%.

Having a strong understanding of how a fund performs during different market cycles provides investors and advisors with broader insight into how a fund might fit into a portfolio and provides a unique benchmarking tool to allow them to assess that managers performance.

Detailed information on Up and Down Capture Ratios for over 600 actively managed funds can be accessed via Australian Fund Monitors.