How to Estimate Potential Losses

[Deleted User]

Someone wrote the other day that a particular mixed asset fund would probably loose 25% in the event of a crash. That made me wonder if there is any practical way to estimate the potential losses of a partiular equities fund, if the market turned down, to different degrees. Taking the  Downside Capture ratio as percentage of the fall by the funds index seems likely to provide some sort of measure but I'm unsure how accurate that would be. Has anyone tried anything similar or know of a different way? This is curiosity as much as anything else and about  trying to quantify a funds risk. 

InvesterJones

Do you mean beta?

[Deleted User]

Do you mean beta?

I was looking at something apart from Beta. Beta measures volatility relative to the market but I wanted to try and quantify potential downside  using capture ratios or similar. Maybe it can't be done, I don't know, that's why I asked. 

GeoffTF

The FTSE 30 was down 75% in the 1970s. The Japanese market was down 90% when it crashed. If the US market crashed, you can be pretty sure that the other markets would follow. Nominal bonds would be wiped out by hyper-inflation, which occurs frequently on a national basis. Either asset class could effectively be wiped out, but hopefully not both at the same time. Your assets could also be confiscated, of course.

[Deleted User]

GeoffTF said:

The FTSE 30 was down 75% in the 1970s. The Japanese market was down 90% when it crashed. If the US market crashed, you can be pretty sure that the other markets would follow. Nominal bonds would be wiped out by hyper-inflation, which occurs frequently on a national basis. Either asset class could effectively be wiped out, but hopefully not both at the same time. Your assets could also be confiscated, of course.

Which is even more reason to explore and understand  any risk measurement and mitigation measures that are available. 

[Deleted User]

An explanation of downside capture ratio for those new to the term.

https://www.investopedia.com/terms/d/down-market-capture-ratio.asp

And a brief AI explanation of the difference between DC ratio and PE.

"The downside capture ratio and the Price-to-Earnings (P/E) ratio are fundamentally different metrics used for distinct types of investment analysis: the downside capture ratio assesses risk management and performance during market downturns, while the P/E ratio evaluates a stock's valuation relative to its earnings". 

The DC ratio isn't particularly useful for trackers or index funds since the DC ratio is a measure of the Fund Managers performance versus the index. The L&G US index for exmple has a DC ratio of 103, which means it captures every down stroke, because it is the index itself. A managed fund on the other hand may have a DC ratio of say 65 for example, indicating that it only captured 65% of the index downsteps thus the managed fund fell less far. 

Alexland

chiang_mai said:

Someone wrote the other day that a particular mixed asset fund would probably loose 25% in the event of a crash. That made me wonder if there is any practical way to estimate the potential losses of a partiular equities fund, if the market turned down, to different degrees. Taking the  Downside Capture ratio as percentage of the fall by the funds index seems likely to provide some sort of measure but I'm unsure how accurate that would be. Has anyone tried anything similar or know of a different way? This is curiosity as much as anything else and about  trying to quantify a funds risk. 

That was probably me and I usually start with 'could drop by around' and finish with 'in a bad crash'. I don't think I would have said 'probably' because it's a very inexact science just intended to give a feel of the kind of risk that people are entering into. Again I don't think I said 'loose' as it's only a loss if you sell low. There are lower impact crashes and corrections and could even be worse crashes as there is theoretically no bottom to the prices people might be willing to sell an asset at if they are utterly terrified and willing to exit at any price.

You can do some analysis on volatility and correlation in normal market conditions to see for example bonds are generally less sensitive than equities (although in exceptions when you get into longer dated bonds or very stable equities that assumption might not hold true) however that doesn't really say what will happen in different crash scenarios for some ILG inventors just have seen 50-80% drops despite it being a less volatile asset leading up to the crash. You can look at past crashes to get a feel but the next crash might be affect prices in different ways.

One way to reduce exposure to the worse of the crashes in terms of depth and duration is to be diversified and have a bias to own things that are reasonably valued to avoid the full impact of the japan, dotcom and recent bond market crashes and whatever we will call the next one. Around half of a global tracker (if they had existed) would have been in Japan in the late 80s.

However greed can cause investors to pile into whatever has recently given healthy returns which has the effect of pumping the price causing more to pile in and the asset's risk to escalate. People start saying to ignore P/Es and future cashflows as this things have permanently changed. So it takes some contrarian tactical asset allocation if you want to keep within a constant range of acceptable risk across asset valuation cycles.

[Deleted User]

A few examples of funds below showing MS risk level, Beta, DS ratio and volatility. The Artemis SG GEMS fund is higher risk yet the DC ratio is only 59, meaning, it could only lose half as much as the index in the event of a markets fall whilst index tracker funds such as FTSE AW may lose 80%. 

Ms Risk	Beta	Equities Funds	D/S Cap	Volatility
87	0.61	Art SmartGARP EU Equities	-9	9.7%
64	0.90	HSBC FTSE All World	80	9.3%
74	0.89	Art SmartGARP UK Equity Class I - Acc (GBP)	59	10.0%
88	0.83	Art SmartGARP GEMs Equity Class I - Inc(GBP)	61	10.7%
66	0.78	JPM UK Equity Plus - HSBC UK FTSE	57	8.1%
68	1.00	M&G Japan	91	10.5%
62	0.54	Polar Capital Japan Value	9	7.5%
-	0.86	Ranmore Global Equity Invest GBP	-8	9.9%

kempiejon

I assume everything on a traded market could drop by 50% or more, perhaps less. Can I find uncorrelated assets and diversify within and without different markets.
I don't think I have the nous or inclination to calculate a risk number for my holdings or what I'd do with it if I looked up ratios someone else has calculated.
 It looks like the DC metric is specific to active funds, an interesting idea so thanks for that link

The down-market capture ratio measures how well an investment manager performs relative to a benchmark index during periods of market decline.

How well a fund tracks an index I would have thought of as tracking error but I've not spent long looking at active funds to see how they fare.

Aretnap

The Russian and Chinese stock markets lost 100% of their values in 1917 and 1949 respectively. So any size of loss is possible, but of course the really big ones involve the sort of tail risks that can't really be hedged against with a conventional investing strategy (keeping your money in the bank, or even in gold bars under the bed, would not have done you much good in revolutionary Russia).

masonic

chiang_mai said:

A few examples of funds below showing MS risk level, Beta, DS ratio and volatility. The Artemis SG GEMS fund is higher risk yet the DC ratio is only 59, meaning, it could only lose half as much as the index in the event of a markets fall whilst index tracker funds such as FTSE AW may lose 80%. 

Those metrics are only relevant under the conditions present over the period they were determined. Beware recency bias, as often this is just a few years. I tend to use: how did it, or a similar fund, perform in the dotcom crash, GFC, and Covid crash as a rough yardstick. Even then, one must be cautious that approaches that limited downside in specific crashes may not work next time.

In the case of Artemis SG GEMS, it fell peak to trough 27% vs 31% for Vanguard GEMs, so I think considering it to have substantially lower loss potential than the index is rather optimistic. It has also very closely tracked the index over the course of 2025, including the tariff correction (-10% in both cases).