Fresh from the MFO Archives! An update on a classic essay.
20 equity funds with the best capture ratios over the entire market cycle
Capture ratio is a sort of “bang for your buck” summary. It’s calculated by dividing a fund’s upside capture (a fund that typically rises 1.1% when the market rises 1% has an upside capture of 1.10) by its downside capture (a fund that typically falls 1.1% when the market falls 1% has a downside capture of 1.10). Capture ratios greater than 1.0 reflect funds that produce more gains than losses; all other things being equal, high capture ratio funds are offering you the greatest reward for every unit of risk you’ve been subjected to.
Capture ratios even the playing field for cautious and aggressive investors. A cautious investor might look for a fund with a downside capture of no more than 0.80. Given that constraint, anything above 1.0 is a winner! Aggressive investors might be willing to accept downside captures of 1.10 as long as they’ve been duly compensated. So, for them too, anything above 1.0 is a winner.
By this metric, some funds have long-term returns of 2% (with virtually no downside capture) while others have returns over 12% (with substantially more downside than the most conservative funds but substantially less downside than the market). Depending on your goals, both 2% and 12% can signal major wins.
I screened f0r:
- equity-oriented domestic funds, which included “flexible portfolios” and “aggressive allocation” funds but excluded global,
- with a capture ratio 1.1 or greater,
- with a downside capture ratio of 0.9 or less,
- over the past 15 years. The logic is that we want to capture performance across entire market cycles, including both the 2007-09 crash, the bull beginning in 2009 and the miscellaneous crashes and surges since then.
I excluded closed funds and high-minimum ones. I also excluded Copley Fund (COPLX), historically a freakishly excellent fund that lost its manager of 40 years recently. All data is current as 0f 12/31/2021.
|Lipper Category||APR||APR vs Peer||SP500 Down Cap %||SP500 Capture Ratio|
|Needham Small Cap Growth||NESGX||Sm Core||13.1||+4.6||87||1.2|
|Parnassus Core Equity||PRBLX||Eq Income||12.4||+4.4||80||1.2|
|Reynolds Blue Chip Growth||RBCGX||Multi Gro||13.5||+1.6||79||1.2|
|AMG Yacktman Focused||YAFFX||Multi Value||11.5||+3.9||75||1.2|
|Provident Trust Strategy||PROVX||Lg Core||11.3||+1.2||73||1.2|
|SEI Defensive Strategy||SNSAX||Flexible||1.6||-4.4||10||1.2|
|BlackRock iShares S&P 500 Growth ETF||IVW||Lg Gro||13.1||+0.5||90||1.1|
|Sit Dividend Growth||SDVGX||Eq Income||10.7||+2.7||90||1.1|
|Fidelity Contrafund||FCNTX||Lg Gro||12.6||0||89||1.1|
|T Rowe Price Dividend Growth||PRDGX||Lg Core||10.6||+0.5||89||1.1|
|John Hancock US Global Leaders Growth||USGLX||Lg Gro||12.2||-0.4||87||1.1|
|Capital Advisors Growth||CIAOX||Lg Core||10.4||+0.4||87||1.1|
|Calvert Equity||CSIEX||Lg Gro||12.1||-0.5||86||1.1|
|Meridian Enhanced Equity||MEIFX||Multi Gro||10.7||-1.1||86||1.1|
|Nuveen Dividend Growth||NSBRX||Eq Income||10.5||+2.4||86||1.1|
|Saturna Amana Growth||AMAGX||Lg Gro||12.8||+0.2||85||1.1|
|Sterling Capital Equity Income||BEGIX||Eq Income||10.1||+2.0||84||1.1|
|AMG Montrusco Bolton Large Cap Growth||MCGFX||Lg Gro||11.3||-1.3||84||1.1|
|Jensen Quality Growth||JENSX||Lg Core||11.6||+1.6||83||1.1|
|Amundi Pioneer Fundamental Growth||PIGFX||Lg Gro||12.4||-0.2||83||1.1|
|Saturna Amana Income||AMANX||Eq Income||9.9||+1.8||82||1.1|
|Vanguard Dividend Appreciation Index ETF||VIG||Eq Income||10.3||+2.2||82||1.1|
|Alger Growth & Income||ALBAX||Lg Core||10.7||+0.6||79||1.1|
|Vanguard Dividend Growth||VDIGX||Eq Income||10.8||+2.7||77||1.1|
|AMG Yacktman||YACKX||Multi Value||11.1||+3.5||77||1.1|
|Invesco Defensive Equity ETF||DEF||Multi Value||9.5||+2.0||76||1.1|
|Madison Dividend Income||BHBFX||Eq Income||9.5||+1.4||71||1.1|
|Intrepid Endurance||ICMAX||Sm Gro||7.3||-3.3||53||1.1|
|Aberdeen US Sustainable Leaders Smaller Companies||MLSCX||Multi Gro||6.7||-5.1||51||1.1|
|AMG GW&K Global Allocation||MBEAX||Flexible||7.4||+1.4||57||1.1|
MFO Great Owl Funds have posted consistently excellent risk-adjusted returns over every trailing measurement period. We have flagged those funds with a bolded blue name.
We’ve also highlighted funds with annual returns above 12% a year and those that capture less than 80% of the S&P 500’s risk with blue highlighting in the corresponding cell.
This list is biased toward mutual funds rather than ETFs by virtue of its time window (15 years ago, there were far fewer ETFs) and its focus on risk management (older ETFs were designed to match markets, not outsmart them). A 15-year retrospective run in 2027 will almost surely have a lot more exposure to active and smart beta ETFs.
Virtus KAR Small-Cap Growth (PXSGX) had the single best risk-return profile, but we excluded it because it’s tightly closed. Good news: in 2021, Virtus KAR recently launched a version with a slightly looser set of constraints, Virtus KAR Small-Mid Growth.
The appeal of the Reynolds Blue Chip (RBCGX) fund is almost entirely driven by its performance during the 2007-09 crash. It appears to have been almost entirely in cash and simply sailed through it. Over the past decade, though, it’s been entirely uninspiring.
FPA Crescent (FPACX) is the largest single holding in Snowball’s non-retirement portfolio, which we mention as a matter of full disclosure rather than as a particular endorsement. FPA recently launched an active ETF that mimics the equity portion of Crescent’s portfolio.
Bottom Line: Statistical screens offer leads, not answers. Your next step is understanding the portfolio behind the excellent numbers. Lewis Braham, a very good financial journalist and frequent contributor to MFO’s discussion board, argues:
I think it is important to analyze sector exposures within funds that performed in the last cycle and analyze how those sectors might perform in the next cycle. Yacktman, for instance, has long held exposure in consumer defensive or staples stocks such as Proctor & Gamble, Coca-Cola, Pepsi, Johnson & Johnson in addition recently to a large slug in Samsung.
The question to ask is has anything changed in the commercial outlook for such steady-eddies? I would argue for instance a lot has changed for a company like Proctor & Gamble as thanks to the Internet the competitive landscape for purchases like razor blades and soap is different. The question then becomes is the money manager aware of these changes. In Yacktman’s case, I think the answer is “yes,” from my experience with them.
Yet just because you’re aware of significant changes in the mainstays of your portfolio, doesn’t mean you have figured out what suitable replacements might be yet. That can be quite challenging.