1. 1The Ins and Outs of Up and Down |
INVESTMENT MANAGEMENT RESEARCH
Executive Summary:
• “Up Market Capture” (UMC) and “Down Market Capture”
(DMC) are commonly used descriptors of past performance.
• The intuitive appeal of these measures is that, by
separating past manager performance data into positive
and negative market environments, investors would be
empowered seemingly to make accurate predictions about
future performance.
• Rather than relying on intuition, we believe that examining
the degree of persistence of UMC and DMC is the
appropriate way to assess their predictive power.
• Using representative data for the U.S. Large-Cap Equity
manager universe, we reject the notions of persistence and
predictability of both UMC and DMC.
• A major flaw in the utility of UMC and DMC is that there
is no such thing as an average up or down market.
• UMC and DMC ratios are, in essence, a simplistic
repackaging of historical performance, and should be
considered subject to standard investment professional
caution about extrapolating the past to the future.
• We believe that qualitatively understanding a manager’s
process and whether they will have lasting exposures to
value, growth, quality, and other factors will go much
further in predicting performance patterns.
Beware the Siren Song of Past Data
As the saying goes, “there are lies, damn lies, and statistics.”
While it may be a surprise to many, “Up Market Capture”
and “Down Market Capture” ratios (hereafter “UMC” and
“DMC” respectively) belong in the third category when
misapplied. It starts with good-enough intentions: calculate
how a manager performs when markets go “up,” and how
a manager does when markets go “down,” and voila, an
investor will know what to expect in fair and foul weather.
However, just because it is possible to calculate something,
doesn’t mean that there is a useful forecast in the results.
Investors have been trained to avoid spurious correlations,
the Charybdis and Scylla of a seemingly endless sea of data.
Many observers have noted that the stock market has done
exceptionally well in the past when the National Football
Conference wins the Super Bowl. However, not even
champion cornerback Richard Sherman in a post-game rant
would tout that the good fortunes of the Seahawks portend
to strong returns this year. Yet when it comes to UMC and
DMC, it is sometimes taken for granted that the past will
be prologue.
It isn’t hard to understand the intuitive appeal of UMC and
DMC – with enough data, it seems reasonable to assume
that how a manager does in certain environments should
hold true in the future. However, believing in the predictive
power of UMC and DMC is the investment equivalent
of an Anglophone succumbing to “les faux amis” when
learning French. While it may be tempting to think that
“actuellement” means “actually” because it feels right,
it won’t get you very far in Toulouse, France. Similarly, it may
be irresistible to extrapolate the future based on how well
a manager performed on average in past up markets,
but it won’t be very useful if the future type of up market
is different from the concept of an average up market.
As when learning languages, the details matter.
The Ins and Outs of Up and Down:
The Flaws of Up Market and Down Market Capture Ratios
David Wong, CFA, FRM
Investment Management Research
CIBC Asset Management Inc.
david.wong@cibc.ca
“We are oft to blame in this, ‘tis too much proved, that with devotion’s visage, and pious action we do sugar o’er the devil
himself.” William Shakespeare, Hamlet
November 2014

2. 2The Ins and Outs of Up and Down |
If a statistic is to have any future usefulness, it should be
persistent, and it should be predictive. If not, the utility
should be limited to describing what the manager has
wrought in the rear view. The remainder of this paper will
look at the facts surrounding this hitherto unquestioned
staple of investment-manager statistics, and why it belongs
at best in the sepia-toned category of a descriptive, rather
than predictive metric.
Calculating UMC and DMC:
No Room for Ringo
UMC ratios are calculated by taking an aggregated series of
a manager’s periodic (usually monthly or quarterly) returns
when the appropriate broad benchmark had “up” or positive
returns, and dividing it by the benchmark’s aggregate return
in those same periods. Similarly, DMC ratios are created
by dividing an aggregated series of a manager’s return
during periods of negative benchmark performance by the
benchmark’s aggregate return in those periods.
This is summarized below:
UMC Ratio = [{ (1+Rm1)*(1+Rmi)^1/N } – 1] / [(1+Ry1)*(1+Ryi)^1/N } – 1]
DMC Ratio = [{ (1+Rm1)*(1+Rmi)^1/N } – 1] / [{ (1+Ry1)*(1+Ryi)^1/N } – 1]
Rm = return for time period when benchmark (Ry) is positive or zero
N = Number of years (e.g. 6 quarters = 1.5 years; 20 months = 1.667 years)
Source: eVestment Alliance
These resulting measures are widely believed to inform
the user of how a manager will perform in an average up
market, and in an average down market. A manager that
has a strong UMC ratio should do well in an up market, and
a manager with a lower DMC ratio should do relatively well
when the market turns south. With a bit of reflection, it isn’t
hard to see the limitations of these measures: there is no such
thing as an average up or down market! Anyone old enough
to contrast the tech bubble with the global financial crisis can
attest to that.
If we look at the past 15 years or so of annual returns in the
U.S. equity market for example, and categorize them as “up”
or “down” markets, it becomes clear that the proximate
causes of market performance can change in any given
year. Sometimes quality drives a market higher, occasionally
earnings growth will lead the market strength, etc. Sector
effects can also explain a manager’s performance in a
particular “up” market, but not in another.
Herein lies one of the major flaws in oversimplifying market
returns: they cannot be fully described with the two simple
and opposing categories of up or down. In a simpler time,
it was once proposed that humanity could be divided
into John Lennon fans or Paul McCartney supporters.
It was unfortunate that there was no check box for the
tone-deaf who appreciated Ringo Starr’s vocal efforts
on Yellow Submarine.
There is a lot of noise around the averages, and managers
have many investment philosophies that respond to the
market differently, depending on whether their stated
disciplines are rewarded or punished. The concept of a
strong up-market or down-market manager can be greatly
misleading as the data in the next section will show.
An Objective Review of the Persistence and
Predictive Nature of UMC and DMC
This section reviews the efficacy of UMC and DMC in being
informative about the expected performance pattern of
a manager. eVestment Alliance’s U.S. Large Cap Equity
Universe was chosen for this study given that it represents
a broad data set of active managers investing money in the
largest and most developed equity market in the world. The
index used in the study was the Russell 1000 Index, a widely
accepted benchmark for broad equity exposure in the U.S.
If UMC and DMC are to be useful as indicators of future
performance, they should be persistent (i.e., the same
across time, or at the very least directionally the same over
time). In other words, if a manager had strong up market
performance in one market cycle, it should hold that it
should have a similar outcome in another market cycle.
A five-year look back period was used in this study to proxy
a market cycle, for periods ending 2008 and 2013. The results
of this review show that there is virtually no link between
UMC and DMC in one period with another.
No Persistence
There were 805 managers in the Universe with data for
both the 2008 and 2013 end dates. Incredibly, only 59% of
managers had the same direction of UMC (i.e., if they had
positive five-year UMC in 2008, they had positive five-year
UMC in 2013) in 2013 as they did in 2008, meaning 41% of
managers that had either positive or negative up-market
capture in the beginning of the study switched sides over
the next five years! This data is visually depicted in Figure 1
below. The correlation of UMC between these two periods
was low at 0.38.
Figure 1: 5-Year Up Market Capture Persistence
2008 vs. 2013
211/292
Managers with
Negative 5-year
UMC
805
Managers
in Universe
513/805
Managers with
Positive 5-year
UMC
292/805
Managers with
Negative 5-year
UMC
261/513
Managers with
Positive 5-year
UMC
252/513
Managers with
Negative 5-year
UMC
81/292
Managers with
Positive 5-year
UMC
261+211 Managers
with same UMC
Direction over study
period = persistence
of 472/805 managers,
or 59%
2008
2013
Source: eVestements Alliance

3. 3The Ins and Outs of Up and Down |
Worse, only 50% of managers had the same direction of DMC
in 2013 as they did in 2008 – the correlation between the
two periods was only 0.29. In other words, for an investor in
2008 hoping to use UMC and DMC data to make a manager
decision and then focus on writing The Great American Novel
for the next five years, they had a coin flip’s chance of being
disappointed. This data is visually depicted in Figure 2 below.
More bluntly, one would have been just as informed in picking
a manager without the ratios in the decision-making process.
Not Predictive
To get a sense of how useful the UMC ratio is as a predictor
of short-term returns, five-year UMC was compared to the
immediately subsequent one-year excess returns. This was
reviewed for the past two strong U.S. equity up markets1
(2012, which experienced a 16.00% return, and 2013, which
had a 32.39% positive performance).
Given the woeful outcome of the persistence test, it could
be seen as redemption that the results for 2013 were very
supportive of UMC being useful in foreshadowing excess
returns in an up market. With 977 managers in this data set,
the correlation between UMC and excess return in the
subsequent up market was reasonably high at 0.59, and the
probability of a manager with a high five-year UMC also having
outperformance in the subsequent up year was respectable
at 69%. Further, the excess return in the up market
experienced by the average manager with strong UMC was
266 bps. This data is visually depicted in Figure 3 below.
Alas, this redemption is short lived. The 2012 study featured
971 managers, and it was found that the correlation between
five-year UMC and the subsequent one-year excess return
was significantly lower at 0.39. Further, the odds of picking a
manager with a positive five-year UMC that also added value
in 2012 was only 40%. Picking the average manager with a
high UMC would have translated to a meagre excess return
of 36 basis points in 2012. This data is visually depicted in
Figure 4 below.
Looking at five-year DMC as a predictor of excess returns in
the subsequent down year provided similarly mixed results.
The last down market in the U.S. was a -37.00% in 20081
;
this end date had 759 managers in the universe with both
a five-year DMC ratio (ending 2007), and a 2008 excess
return. The correlation between five-year DMC and one-year
excess return was calculated to be -0.50, which highlights
that managers with negative (positive) five-year DMC had
subsequent positive (negative) excess returns in 2008. This
indicates some utility of DMC as a guide in down markets.
The odds of picking a manager with a negative five-year
DMC that also added value in 2008 was 72%. The average
manager with negative DMC would have translated to an
impressive excess return of 305 basis points. This data is
visually depicted in Figure 5 below.
Figure 2: 5-Year Down Market Capture Persistence
2008 vs. 2013
805
Managers
in Universe
275/805
Managers with
Positive 5-year
DMC
530/805
Managers with
Negative 5-year
DMC
125/275
Managers with
Positive 5-year
DMC
150/275
Managers with
Negative 5-year
DMC
249/530
Managers with
Positive 5-year
DMC
281/530
Managers with
Negative 5-year
DMC
125+281 Managers
with same DMC
Direction over study
period = persistence
of 406/805 managers,
or 50%
2008
2013
Figure 3: Predictive Power of UMC in an Up Market
(2013 Example)
977
Managers
in Universe
418
Managers
with
Positive
5-Year Up
Market
Capture
291/418
Managers with
positive excess
return in 2013
(69%), average
excess return =
266 bps
5-Years ended December 31, 2012 2013
Figure 4: Predictive Power of UMC in an Up Market
(2012 Example)
971
Managers
in Universe
404
Managers
with
Positive
5-Year Up
Market
Capture
162/404
Managers with
positive excess
return in 2012
(40%), average
excess return =
36 bps
5-Years ended December 31, 2011 2012
Figure 5: Predictive Power of DMC in a Down Market
(2008 Example)
759
Managers
in Universe
504
Managers
with
Negative
5-Year Down
Market
Capture
363/504
Managers with
positive excess
return in 2008
(72%), average
excess return =
305 bps
5-Years ended December 31, 2007 2008
Source: eVestements Alliance
Source: eVestements Alliance
Source: eVestements Alliance
Source: eVestements Alliance

4. 4The Ins and Outs of Up and Down |
Things look considerably worse, however, when reviewing
the on-set of the prior multi-year down market, which
began with a -9.10%1
in 2000 and lasted for two more years.
There were 365 managers that had both a one-year excess
return in 2000, and a five-year DMC to the end of 1999. The
correlation of 0.26 highlights that there is a weak positive
relationship between managers with negative (positive)
five-year DMC having subsequent negative (positive) excess
returns in 2000. This indicates that not only was a low DMC
not helpful in identifying a manager that could add value
in a down market, but it was actually harmful!
The odds of picking a manager with a negative five-year
DMC that also added value in 2000 was 73%. While this
sounds impressive, the odds of picking a manager with
positive DMC that had subsequent outperformance in the
2000 down market was even higher at 88%!
The average manager with negative down-market capture
would have translated to an impressive excess return of 730
basis points, but as the positive correlation statistic implies,
the excess return of a manager with positive DMC was even
more impressive at 1,371 bps. While the large magnitude of
outperformance in both camps may seem unusual, it needs
to be placed in the context of the median manager in the
overall universe adding 842 basis points in 2000. This data is
visually depicted in Figure 6 below.
Clearly, one would not want to rely on UMC/DMC ratios to
pick a manager if one was skilled at predicting bull or bear
markets. The data show that the notion of an up market
and a down market overly simplifies the myriad factors that
lead to the actual outcome. Therefore, when a manager
presents themselves as delivering strong performance in up
(down) markets, it is important to follow up by asking what
specific type of up (down) market they are referring to in
order to understand the factors that may better predict the
performance pattern.
Predictive Powers of Manager Research
It is broadly understood by knowledgeable investors
that past performance is no predictor of future returns.
Yet many of these enlightened investors are comfortable
taking those same past returns, repackaging them as
UMC/DMC and then deducing meaning from them.
Taking liberties with Polonius’ admonition in Hamlet,
we must be careful to avoid bringing virtue to past
performance through a devotion to a derivative of it.
This is not to say that there is no place for UMC/DMC in an
investor’s toolkit. Taken as metadata, they can be descriptive,
but certainly not prescriptive. Qualitatively understanding
a manager’s process and whether they will have lasting
exposures to value, growth, quality, and other factors
will go much further in predicting performance patterns
than a simple averaging of past returns in up and down
markets. Market-capture ratios may be proverbial “faux
amis” waiting to double-cross your quarterly statements.
A strong fundamentally based manager research process
offers investors their best chance of identifying managers
capable of delivering their desired performance results.
Figure 6: Predictive Power of DMC in a Down Market
(2000 Example)
357
Managers
in Universe
165
Managers
with
Negative
5-Year Down
Market
Capture
121/165
Managers with
positive excess
return in 2008
(73%), average
excess return =
730 bps
5-Years ended December 31, 1999 2000
563
Source: eVestements Alliance
1
S&P 500 Total Returns Index (USD). Published in November 2014.This analysis and calculations are for illustration purposes only.The calculations are based
on a number of assumptions and consequently actual results may differ, possibly to a material degree.This article is provided for general informational
purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any
securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should
consult with his or her advisor.The information contained in this document has been obtained from sources believed to be reliable and is believed to
be accurate at the time of publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such.All opinions and
estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change.The material and/or its contents
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