Avoiding Downside?
One metric that tracks potential investment losses is the downside capture ratio, which indicates how investments fare in a down market relative to a benchmark. Like all performance metrics, it is one input in a broader assessment.​​​​

Chart for companies using the cloud for HR

  • ​If an investment​ declines 12% in down markets as compared to a benchmark’s 10% decline, the downside capture ratio is 1.2. Risk-conscious investors often use this ratio to ascertain how much a given investment may decline during times of negative performance.

  • No one knows exactly when the market will decline so how useful is the downside capture ratio? As the chart illustrates, over the past three years a defensive industry with a strong downside capture ratio, Electric Utilities, dramatically underperformed a growth industry, Internet Retail, which has a relatively high downside capture ratio. Over the past three years, the latter has compounded value better in periods when the market did not decline.

  • Furthermore, during 2007-2009 when the broader equity market was down, Internet Retail still outperformed both the broader market and Electric Utilities. Even groups like Software and Semiconductors with worse/higher downside capture than the S&P 500 outperformed the index during that period. So poor downside capture does not necessarily lead to underperformance in a declining market.

  • Downside capture is just one of many tools available. No single statistic defines the risk profile of a strategy. Investors should use multiple metrics to understand risk. Companies that grow their sales and earnings through difficult economic environments, e.g., Internet Retail firms, may provide the best downside protection.


The views expressed are the views of Fred Alger Management, Inc. as of May 2019. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Past performance is not a guarantee of future results.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares.

Risk Disclosure: ​Investing in the stock market involves certain risks, and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Technology companies may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies.​

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