NEW YORK (
) -- It isn't easy to find funds that can withstand downturns. Even funds with strong long-term records can sink hard when markets fall. But to avoid painful surprises, check an indicator known as the downside capture ratio.
The indicator measures how much an investment has declined compared to a benchmark such as the
. Say the S&P dropped 10%. An index fund that fell the same amount would have a downside capture ratio of 100%. A resilient fund that only dropped 5% would have a downside capture figure of 50%.
To evaluate money managers, institutional investors have long relied on downside capture ratios -- as well as upside capture ratios, which measure performance in upturns. Now
has begun offering the data for retail investors.
The capture ratios make intriguing reading. Say you think that the market is ready to boom, and you want to goose returns. You might try
Columbia Select Large Cap Growth
, which has an upside capture of 120% during the past 10 years. That means the fund has outdone the S&P 500 by 20% during rises.
If you are a cautious investor, a sound choice is
American Century Equity Income
, which has a downside capture of 55%.
But keep in mind that most funds excel in either up or down markets, but not both. Consider
Alger Midcap Growth
, which has an upside capture of 132%. That looks tempting, but the fund has a high downside capture of 130%. In other words, the fund has scored big gains in bull markets and suffered painful losses in downturns.
To smooth out results, you might consider holding a diversified mix of funds, including some that do well in downturns and others that excel in up markets. But there are a number of funds that beat the benchmark in both up and down markets. These steady performers can make intriguing holdings that can deliver sound long-term results.
Among the most reliable choices is
Wasatch Large Cap Value
. The fund has done especially well in downturns, posting a downside capture of 81%. The upside capture is 104%. During the past 10 years, Wasatch has returned 8.1% annually, outdoing 99% of large value peers.
Portfolio manager Ralph Shive likes unloved companies with solid balance sheets. The portfolio includes many dividend-paying blue chips, stocks that tend to be resilient in downturns. Shive often aims to buy when economic trends seem likely to give the stocks a long-term lift. Lately he has been favoring energy companies. Those stand to gain from growing demand in emerging markets. A holding is
, which supplies rigs and crews to companies that are drilling offshore for oil and gas.
Shive also likes chip giant
. In the past, the stock was always too expensive for the Wasatch fund. But in recent years, the price-earnings ratio has steadily fallen. The stock currently trades at a multiple of 10, well below the market average.
"People are disappointed that the company is not participating more in the smart phone business, but Intel still has a great balance sheet and a leading market share," Shive said.
Another steady fund is
, which has a downside capture of 97% and an upside figure of 108%. During the past 10 years, Baird has returned 6.3% annually, outdoing 57% of mid-growth peers. Portfolio manager Chuck Severson looks for companies that are increasing sales and earnings faster than competitors. He avoids turnarounds and favors companies that can grow consistently for years.
"Reliable growers tend to hold up better when markets are challenging," Severson said.
A favorite holding is
, which provides specialized services for offshore drillers. The company supplies submersible vehicles that are used to connect wells to pipelines.
"Demand for undersea vehicles will grow as major oil companies have to go into deeper water to find reserves," said Severson.
He also likes
, which distributes bolts, screws, and other industrial and construction supplies. The company has achieved consistent growth while recording higher margins than peers.
A sound fund for cautious investors is
Westport Select Cap
, which has a downside capture of 94% and an upside figure of 114%. During the past 10 years, the fund has returned 8.1% annually, outdoing 55% of competitors. Westport buys solid companies that have become cheap because of problems. The portfolio managers aim to hold the shares for years while the businesses turn around and resume healthy growth.
A favorite holding is
, a closeout retailer that sells food, household products, and furniture. After suffering weak sales in the recession, the company is resuming its expansion.
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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.