Up Market or Down, These Funds Have Beaten Their Benchmarks

There's no shortage of fund performance metrics available on Morningstar.com, but some tend to get more attention than others. Two of the less heralded of these metrics are upside capture ratio and downside capture ratio, both of which can be valuable tools in assessing how a fund performs under various market conditions. Putting together funds with different characteristics--one with very strong upside performance, another with a history of better downside activity--can also help you assemble an all-weather portfolio.  

The idea behind upside/downside capture is to quantify the degree to which a fund has outperformed or underperformed its benchmark when the market has gained in value (upside capture) as well as when it has lost value (downside capture). Upside capture ratio is calculated by taking the fund's monthly performance in every month in which the benchmark experienced gains and dividing it by the benchmark's performance. A fund with an upside capture ratio of 110 would have outgained its benchmark by 10% on average each month that the benchmark gained in value (a ratio of 100 would be a perfect match in performance). For downside capture, only months that the benchmark lost value are considered. Therefore, a fund with a downside capture ratio of 90 would have lost 10% less on average than the benchmark in all the months when the benchmark lost value. Thus, for upside capture higher numbers are better while for downside capture lower numbers are better.

Upside and Downside Capture Ratio data are available on Morningstar.com fund pages under the Ratings & Risk tab, where you'll find calculations for the trailing one-, three-, five-, 10-, and 15-year periods at the bottom of the page as well as category averages for those time periods. The benchmark used for these calculations is found in the MPT Statistics section, where it says “vs. Standard Index.” For U.S.-stock funds, the benchmark used to calculate upside and downside capture is always the S&P 500. For international-stock funds it's the MSCI ACWI Ex USA Index, and for bond funds it's the Barclays Aggregate Bond Index. You can read more about the upside and downside capture calculations here.

Given that most funds tend to perform better either in up or in down markets, you might assume that no fund outperforms the benchmark in both, but that's not true. A search of all large-cap equity funds with track records of at least 10 years found that about 8% had managed to outperform the S&P 500 to both the upside and the downside during the past decade. Among these two-way achievers, we set out to identify those with the largest gap between their upside and downside capture ratios. In other words, the funds performed exceptionally well to the upside, to the downside, or both. We've omitted institutional funds because many investors do not have access to them. Here's the list.

Funds With Biggest 10-Year Upside and Downside Capture Ratio Gap
Fund	Category	Upside Capture Ratio	Downside Capture Ratio	Difference	Star Rating	Analyst Rating
Amana Growth (AMAGX)	Lg Growth	102.15	83.55	18.60		Silver
Fidelity Foc Stk (FTQGX)	Lg Growth	115.79	98.20	17.59		N/A
Sterling Cap Sp Op (BOPAX)	Lg Growth	104.05	87.09	16.96		N/A
Fidelity Adv New Ints (FNIAX)	Lg Growth	102.72	86.77	15.95		Silver
Fidelity Contrafund (FCNTX)	Lg Growth	102.61	86.72	15.89		Silver
Laudus US Lg Cp Gr (LGILX)	Lg Growth	113.56	99.16	14.40		Neutral
Vice (VICEX)	Lg Blend	105.82	92.65	13.17		N/A
Eaton Vnc Div Bldr (EVTMX)	Lg Blend	104.58	91.68	12.91		N/A
SunAmerica Foc Div (FDSAX)	Lg Value	101.84	89.03	12.81		N/A
Vanguard Primecap (VPMCX)	Lg Growth	108.06	95.70	12.36		Gold
Waddell/Reed Core	Lg Growth	107.57	95.92	11.65		Bronze
Rbco Bos Prt All Cap (BPAVX)	Lg Value	107.19	95.61	11.58		N/A
Diamond Hill Lg Cp (DHLAX)	Lg Value	103.51	92.98	10.53		Silver
TIAA-CREF Gr & Inc (TIIRX)	Lg Growth	102.24	92.30	9.94		Neutral
Gabelli Asset (GATAX)	Lg Blend	109.24	99.83	9.40		N/A
Waddell/Rd Tx Mng	Lg Growth	103.87	94.65	9.23		N/A
T. Rowe Nw Am Gr (PRWAX)	Lg Growth	106.48	97.44	9.04		Neutral
Ivy Core Eq (WCEAX)	Lg Growth	105.32	96.38	8.93		Bronze
Timothy Lg/Md Cp (TLVAX)	Lg Blend	107.41	98.56	8.85		N/A
MassMut Slct Gr Op (MMAAX)	Lg Growth	108.00	99.22	8.77		N/A
Data as of Feb. 28.

As you can see, many funds here have Morningstar Ratings for funds of 4 or 5 stars--no surprise given that funds made the list by riding the dramatic ups and downs of the market's past decade particularly well. However, there are some notable exceptions. Take, for example, chart-topper  Amana Growth (AMAGX). The fund, which makes investment choices based on Islamic principles, avoids financial-services stocks, helping it steer clear of the sector's 2008 meltdown and resulting in a remarkably low 83.55 downside capture ratio during the past decade. However, as the financial crisis has receded in the distance, the fund's downside capture advantage has diminished with it, to the point that it reached a more pedestrian 93.66 during the past year.

As another reminder that upside and downside capture data can be somewhat volatile, let's look at Eaton Vance Dividend Builder (EVTMX). The first part of the fund's 10-year trailing record looks pretty good: The fund outperformed the S&P 500 by at least 12 points each year from 2004 to 2007. But the fund has lagged the index each year since. (Note: The fund carries a 1-star rating based on its three- and five-year trailing performances only because the fund underwent a major restructuring in 2007 and therefore its rosier 10-year relative performance is excluded.) The fund's one-year upside and downside capture ratios illustrate the potential for volatility in this metric. Its 10-year upside capture ratio stands at 104.58 (as of Feb. 28) while its upside capture ratio during the most recent 12 months was just 91.66, meaning that during the past year it has not been able to keep pace with the S&P 500 during months when the index gained. The downside was even worse. Although the fund captured just 91.68% of the index's performance in months when the index floundered during the trailing 10-year period, during the most recent 12-month period it captured a whopping 121.83% of its downside performance.

Although upside and downside capture ratios can be enlightening statistics, like any other, they require additional information to give them context. As we've just seen, it can pay to look at both a fund's long-term and near-term upside and downside capture ratios because these can differ considerably. Comparison with category averages also can help you determine whether it's an outlier (either good or bad) or typical among its peers.

As always, if you're considering adding a fund on the above list to your portfolio--especially one that hasn't been vetted by our analyst team or that carry a Neutral Analyst Rating--be sure to review other key metrics, including Morningstar Risk rating and the fund's long-term performance as well as how it behaved during important time periods, such as the 2008 market drop and 2013's raging bull market. Additionally, pay attention to the fund managers' levels of experience and track records, and don't forget to keep an eye on fees the fund charges.