Are All Capture Ratios Created Equal?

Abstract

This study aims to shed light on a freely published mutual fund screening tool—the capture ratio—and its ability to predict future fund performance (i.e., alpha). This analysis is of interest for both financial advisors and retail investors who deploy mutual fund screening tools. We find that capture ratios measured over shorter periods, such as one year, do not exhibit subsequent performance predictability. Conversely, we find that the three-year and five-year capture ratios are useful for investors in the full sample. However, analysis across cap and style-based fund subsamples shows that this return predictability is most consistent in predicting three- and five-year performance. TOPICS: Mutual funds/passive investing/indexing, performance measurement Key Findings ▪ Capture ratios measured over one year are unreliable in predicting mutual fund performance. ▪ Capture ratios measured over three and five years exhibit consistent performance predictability across cap and style fund subsamples. ▪ Mutual fund investors exhibit a real return-chasing behavior as it relates to capture ratios.