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"Duration" as an added component to Mutual Fund MaxDD (Draw Down)

edited July 2014 in Fund Discussions
MaxDD or Maximum Draw Draw is to me only half of the story.

Markets move up and down. Typically the more aggressive the fund the more likely it is to have a higher MaxDD. I get that. What I find "knocks me out of a fund" in a down market is the funds inability to bounce back.

When managers employ strategies that reduce the timeframe after a MaxDD (employing cash, being defensive then aggressive, etc.) they can shorten the duration a fund stays in the MaxDD phase. To me, the phase ends when the fund returns to a previous level of growth. As an investor, a fund that employees strategies to shorten the duration it stays in MaxDD stands a chance of having the investor "hold on for the ride" and not bail on the fund at the very worse time.

I have owned some "dead cat funds" over the years (Vanguard US Growth comes to mind) and I have had to bite the bullet and sell after years and years of underperformance after it initially bottomed. I appreciate managers who understand that investors need a reason to hang on when funds are phasing back to growth, but as I age I don't bounce back as quick from a fall. In my opinion, the shorter the phase the funds need to be a little sprier and I.

Anyway, I would love your candidate for a fund that despite it's MaxDD it maneuvers the rough waters quickly even as markets cycles and market valuations changed. What's your shortest Duration MaxDD fund?

Here's two aggressive growth funds POAGX (MC/ LC) and BUFOX (Micro Cap) that have very different "return to growth phase durations:



  • edited July 2014
    Hi bee. Quick answer is Ulcer Index (UI). That actually reflects MAXDD and duration. I will work up some examples, but funds with shorter drawdown periods like you discuss will have lower UI even if they experience the same absolute MAXDD over specified period. And, Martin Ratio is excess return divided by UI. So, such funds will have higher Martin Ratio and therefore higher ranking in the MFO rating system. Will follow up.
  • Thanks Charles...look forward to examples and thanks for the explanation of UI and Martin Ratio. VWUSX didn't give me an ulcer back in 2000-2002, but did burn a hole in my portfolio.
  • edited July 2014
    Here's quick example...,+WQCEX&submit=Submit

    MAXDD same @ -51.3%, but WQCEX has causes nearly twice the ulcers as OAKMX (UI = 22.1 vs 12.1).
  • edited July 2014
    So, looks like OAKMX recovers (surpasses previous peak) maybe 3 years sooner than laggard WQCEX, as seen below in M* chart:

  • Quick reminder of Ulcer Index definition, which is penultimate basis for MFO ratings:

    By the great-one himself, Peter Martin.
  • edited July 2014
    BTW. I do like your idea of adding Retracement Period to the metrics. A warning perhaps of just how long the ulcer can last...right along side MAXDD. Will work on that!
  • Thanks Charles,

    Learning, for me, has always been on a 'need to know basis", so thanks for reaching out with lots a great responses in this thread.

    Being unfamiliar with the technical concepts of investing I often feel like I just walk into a party (in full swing)...your work is eons ahead of my comprehension, but the light's on so I'll walk in. I usually arrive through the back door uninvited.

    Thanks for your generous welcoming attention and to all that you do here at MFO.

    You're a big reason why MFO has a genuine community feel.
  • @bee: compare jaenx & macgx to poagx. More of apples to apples comparison. I see what you're after in draw down to recover time , but don't think bufox was the right fund to use.
    Good investing,
  • This has been a great learning thread for those of us no experts in the mutual fund universe. Thanks for bringing this up.
  • Do junk bond funds count or are we just talking about equity funds? Junk bonds had their worst year/largest drawdown on record in 08 yet by August of 2009 the Merrill Lynch High Yield Master II Index was back to hitting all time highs. I haven't checked but the managed junk bond funds were back to hitting all time highs shortly thereafter, if not sooner for a couple select junk funds.
  • Junkster said:

    Do junk bond funds count or are we just talking about equity funds?

    A High Yield fund with a fairly long history I hold is USHYX. It too has had equity like draw downs, but short durations back to growth afterwards. You probably have a short list of HY bond funds that if you had to stick with them you could "hang in" there.

    What are some of your HY fund stars?
  • Actually Max DD to me is very important. Especially for 10-15 year old funds who have gone through few market cycles. It tells a lot about the manager.

    Some like Schwab report Upside Capture and Downside Capture. Not quite sure how they capture that data and how reliable it is. Max DD on the other hand is crystal clear.
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