Capital Markets: Observations and Insights Autumn 2019

The Downside of Downside Capture ​ Reframing Risk

RISK

• Low downside capture is thought to reduce risk, but over reasonably long periods, strong secular growth can provide superior returns, even in down markets

Low Downside Capture Can Underperform Secular Growth in Both Bull and Bear Markets

Downside Capture

Annual Return

Performance During Bear Market (3 years ended 12/31/2009)

Performance During Bull Market (3 years ended 9/30/2019)

30%

-20% 0% 20% 40% 60% 80% 100% 120% 140%

120%

0% 1% 2% 3% 4% 5% 6%

100%

Downside Capture

Downside Capture

80%

20%

60%

40%

10%

20%

Annual Return

Annual Return

0%

-2% -1%

0%

-20%

Electric Utilities Internet Retail

Telecom Software

Source: Morningstar. The figures presented are provided for illustrative purposes. They include examples of the performance of two industries with downside captures above and below 100%, respectively. Examples of such performance during a bull market and bear market are provided. Please note that using different industries or different time periods might have materially different results than those shown above. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.

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