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This week, we take a look at down market captures (DMC) relative to top, middle, and bottom tier managers for U.S. large-cap equities. Down market captures illustrate how active managers perform during periods of negative benchmark performance. In this case, we are comparing the last 12 years of rolling 1-year down market captures for U.S. large-cap core managers who feature the S&P 500 index as their primary benchmark.
Theoretically, passive management is less beneficial than active management in down markets as passive management will capture 100% of the index returns during the negative periods. In examining the median manager down market captures (red line in chart), we see that the majority of the time active managers are able to outperform the benchmark in times of market declines (a reading below 100 indicates that the manager lost less than the benchmark).1 This is more evident when looking at the DMCs of managers in the 25th percentile. These managers are consistently outperforming the benchmark during the down market, and losing less capital for their investors. Managers in the 75th percentile consistently have DMCs greater than 100%, meaning they captured more than the negative performance of the benchmark, thus failing to protect in a downside market.
Given the overall efficiency of the U.S. large-cap equity asset class, many investors have moved away from active management over the last five years. And while this trend is not likely to reverse itself anytime soon, those who have identified above median managers may face less downside risk in the event of a market correction.
1It should be noted that outperforming the benchmark in times of market drops does NOT equate to positive returns; the manager just loses less than the benchmark.
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