Equity and Bond markets are getting no vacation this Summer from a robust news cycle. Trade negotiations between China and the US appear to be at a stalemate, with both sides ratcheting up the negative rhetoric and policies seeking to gain an edge in the negotiations. Global growth indicators continue to show signs of slowing as a result while fixed income markets have reacted by pushing up bond prices effectively lowing interest rates. If the issue is a lack of business confidence, lower interest rates are unlikely to be a perfect solve for the growth problem.
This could be a perfect time to review upside and downside capture ratios with clients. These metrics can be handy when assessing client risk tolerance over time. When we speak of upside capture, we are measuring the how an investment performs during periods of positive returns for a benchmark. An upside capture ratio of greater than 100 indicates an investment has generally outperformed the benchmark during periods of positive returns. Conversely, downside capture measures relative performance to a benchmark during negative periods. A downside capture ratio of less than 100 indicates that an investment has lost less than its benchmark during periods when the benchmark has been in the red.
In a perfect world, an investor would love to see at least 100% of benchmark upside but less than 100% of benchmark downside. Since US equity markets tend to go up over time, it’s important to seek attractive long-term upside capture. However, an investment with an attractive downside capture ratio can preserve capital and go a long way towards keeping risk averse investors from panicking during significant market drawdowns. Picking up relative performance in down markets and just keeping up in positive markets can be just the right recipe for many risk averse clients.
The Logan Capital Dividend Performers and Dividend Performers Balanced separate account strategies have a long history of attractive downside capture ratios. In fact, Dividend Performers has never underperformed its benchmark during any significant market sell off. Notably, during the last major correction in 2008, Logan Dividend Performers outperformed the S&P 500 index by 679 bpts for a downside capture ratio of 82%. According to PSN, over the lastthree- and five-years Dividend Performers downside capture has been just over 88% of the S&P 500 index, a 19th and 16th percentile result against all large cap core managers in the PSN database. In the more recent fourth quarter market decline, the downside capture ratio was just 73%.
|
Downside Preservation During Recent Down Markets |
9/21/18 – 12/26/18 |
1/26/18 – 4/2/18 |
11/03/15 – 2/11/16 |
|
Logan Dividend Performers |
-12.33 |
-9.39 |
-10.67 |
|
S&P 500 |
-15.31 |
-9.78 |
-12.73 |
|
Downside Capture |
80.5% |
96.0% |
83.8% |
|
3 Year Downside Capture |
88.3% |
||
|
5 Year Downside Capture |
89.0% |
Factset Data |
The Dividend Performers strategy is designed to be an all-weather portfolio that is expected to provide above average returns over time with less overall risk than the S&P 500. If you have further questions regarding this strategy, please contact Christopher Travers at 215-851-9499.
Disclosures: Performance data generated by Factset and based on Dividend Performers composite returns.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Christopher O’Keefe
CFA Lead Manager, Logan Dividend Performers,
Dividend Performers Balanced