Hi Clive, Re: Day BETA...........
I think I was just having some fun on a nasty day in the market. Actually, the day calculation would be downside capture ratio. Upside capture ratio can be calculated the same way. However, it's really meaningless on a daily basis. A summary of such data or a calculation such as yours would be of greater value.
I've been looking back over my longer AIM histories and have become intrigued with the Upside and Downside Capture Ratios. It seems to be an expression of AIM's overall management style that we are closer to the upside movement than to the downside.
As an AIM account approaches 100% invested, then its upside and downside should more closely approach movement of Buy & Hold for a single investment. This is also true of a portfolio of AIMs relative to a portfolio of Buy/Holds. What is interesting is that after several market cycles, the AIM performance can outdistance buy/hold, not because of superior upside capture, but because of lesser downside capture.
Only when AIM and Buy/Hold are both 100% invested does the upside capture ratio become equal. Slowly as AIM divests itself of shares held the upside capture ratio starts to decline.
I believe the long term advantage becomes apparent because of the lag between the ending of a sell cycle and the commencing of a buy cycle and visa versa. That lag isn't time based but price based. The discount from selling to buying and the premium from buying to selling compounds with each cycle.
Maybe this is all more easily understood with other statistics. Upside movement of the portfolio relative to a suitable benchmark is what most people desire. They enjoy looking at the upside far more than the downside. However, if a management strategy leaves the downside also lockstepped with the benchmark, then there's been no gain from the strategy.
The '09 - '10 market climb should have been of benefit for AIM users at or near the 100% upside for part of the journey. Only as cash began to accumulate would the upside start to diminish. When a market bull begins to fatigue, AIM should be cash rich and showing the poorest upside comparisons. But also, if that fatigue deteriorates into a bear market, AIM then is heavily insulated from the downside capture. Because AIM requires a substantial discount from previous selling before parting company with cash reserves, the downside capture ratio becomes even more beneficial until that first purchase is made. (better Cash/Equity ratio during decline until cash is spent)
Usually by the time the first of AIM's cash is spent, the markets have declined a significant portion of what will eventually be the final bottoming. If our AIM machine is set up for a 20% discount, for instance, from selling to buying then during that time AIM does very well against Buy/Hold. If the eventual decline should take prices down 50%, AIM hasn't spent any $$$ for 40% of the decline and only then started its buying. At that point the downside capture ratio starts to grow back toward 100% of the benchmark of Buy/Hold.
I guess it would be the ratio of our Upside and Downside capture that would then be a useful expression of performance. If we managed to capture 80% of the upside while only 60% of the downside, then it could be expressed as 0.80/0.60 or 1.33 Performance capture. That would also be the same as a 90% upside and a 68% downside, etc.
Just some noodling on a windy and chilly Wisconsin morning.....
Best regards, Tom
