The research from Australian Fund Monitors looked at the top-performing global equity managers in terms of their ‘up capture’ and ‘down capture’ rates – that is, to what extent they were outperforming the broader market in a bull phase, and avoiding the full brunt of a market decline.
“Ultimately, you should expect a long-only fund to have an up-capture ratio of greater than 100 per cent, indicating that the fund performed better than the market in the months the market was positive,” the research group said.
“You would expect a long/short fund to have a down-capture ratio significantly lower than 100 per cent, indicating that the fund has protected against the downside.”
The data looked at the performance of global equity funds in the three years to May 2021 – during which the market was positive for 23 months and negative for 13 months – and found that the best-performing fund over this period had the highest up-capture rate at 151 per cent, and the fifth lowest down-capture rate at 57 per cent.
All 14 funds in the top quintile for performance over this period were in the first and second quintile for up-capture rates, and the first, second or third quintile for down-capture rates, the research revealed.
However, long-short funds in the global equity space did not perform as strongly as expected when it came to reducing volatility in returns. While these funds had a lower average up-capture rate of 82 per cent, they also had a relatively high average down-capture rate of 86 per cent.
Around a third of long-short global equity funds also had down-capture rates of 100 per cent, indicating they weren’t protecting investors from the worst of market downturns.
Looking at global equity fund performance on a longer time horizon, the data found that the top-performing fund on a five-year benchmark had the second highest up-capture rate at 148 per cent, and the sixth lowest down-capture rate at 70 per cent.
The longer-term data also revealed that long-only equity funds were just as competitive as long-short when it came to protecting investors against market downsides, with an average down-capture rate of 87 per cent.
Just eight out of 43 long-only global equity funds had a down-capture rate of 100 per cent over five years, the research found.
