There is an old saying: “What goes up must come down.” However, for an investment manager, perhaps it should be “What goes up hopefully goes down less.” The true skill of an investment manager should be measured not only by the highest return, but also the risk taken to achieve that return (more specifically, the downside risk).  While traditional risk statistics like Standard Deviation, Sharpe Ratio, and Information Ratio can help you determine the risk efficiency of a return, the Upside/Downside Capture can help you understand and communicate the directional volatility in your client’s portfolio.

When a portfolio suffers sharp losses, in particular when income is being drawn down from the portfolio, it can be difficult to replace those losses with gains.  As a result, many investment managers deploy strategies to capture the up market, i.e. “ride the bull market,” while capturing less of the downside, i.e. “staying away from the bear market.”  A variety of low-volatility strategies may be utilized, including diversification, managed volatility, hedge funds, and/or managed futures.  The sample report above demonstrates how the portfolio, a market benchmark, and additional comparable indices have captured the upside and downside.  In this example, you can see that the portfolio (red triangle) has performed efficiently, capturing only 90% of the downside and 111% of the upside.

Interested in making Upside/Downside capture reporting a part of your branded client reporting package? Contact your Client Service Manager below and if you do not know your Client Service Manager, contact us and we can help you out!

• Kate Baird – [email protected]
• Jeanne Benson – [email protected]
• Rob Bethmann – [email protected]
• Jon Beadles – [email protected]

We look forward to hearing from you!

Marshall Smith( EVP, Services )

Marshall Smith CIPM, EVP of Services, has been with First Rate since 2006. You can follow Marshall on Twitter @MarshallCSmith, or connect via LinkedIn.