The Performance Predictor 401(k) Fiduciaries May Be Overlooking

Past performance may be the most scrutinized number in investment selection – and one of the least useful on its own.

S&P Dow Jones Indices’ latest Persistence Scorecard makes the point: among U.S. domestic equity funds that ranked top-quartile over the five years ending 2020, only 17.2% remained top-quartile over the next five years, while 45.5% fell to the bottom quartile – even after excluding funds that did not survive or remain in the same category.

For 401(k) fiduciaries, that finding has practical implications. A plan’s investment committee must evaluate and monitor funds through a prudent process, but that process should not rely on trailing returns as though they were a reliable forecast. If past returns tell us so little about future returns, perhaps the better question isn’t how much a manager earned, but how they earned it.

Research suggests one measure may help answer that question better than others: capture ratio.

Capture ratio may provide fiduciaries with an additional way to understand a manager’s behavior, frame questions for the investment committee and document why a fund remains appropriate for the plan.

Looking Beyond Past Performance

In its 2026 study, Active Investing: Tilting the Odds in Your Favor, Vanguard examined roughly 1,600 actively managed U.S. equity funds from 1990 through 2022, testing fund characteristics against excess returns over the subsequent three years.

Cost was a strong predictor. But Vanguard also concluded that capture ratio was both associated with higher future excess returns and “tends to be more predictive of future performance than prior absolute returns alone.” That’s a significant finding.

And Vanguard isn’t alone.

A 2019 peer-reviewed study by Timothy Marlo and Jeffrey R. Stark found that upside and downside capture characteristics persist over time and contain information about subsequent fund performance. Most importantly, funds demonstrating favorable capture characteristics significantly outperformed over the subsequent year.

Then, in a 2021 peer-reviewed study, Brandon Cline and Collin Gilstrap examined that relationship more directly. They defined “Capture Spread” as upside capture minus downside capture – the same calculation we call Net Capture. Analyzing more than 25,000 annual fund observations from 1990 to 2016, they found that funds in the highest Capture Spread quintile outperformed those in the lowest quintile by 720 basis points the following year. The relationship remained significant after controlling for expenses, size, turnover, age and manager tenure.

Different methodologies. Similar conclusion: the relationship between upside participation and downside protection may be predictive of future performance.

For investment fiduciaries, the point is not that a favorable capture ratio proves a fund should be selected. It is that capture data may help make the evaluation process more complete. A committee can use it to compare managers with similar mandates, investigate whether a fund’s results are consistent with its stated strategy and identify changes that warrant follow-up.

The Asymmetric Math of Loss and Recovery

Upside capture measures how much of a benchmark’s gain a fund participates in when the benchmark rises. Downside capture measures how much of its decline the fund experiences when it falls.

Net Capture is simply the difference: Net Capture = Upside Capture − Downside Capture

Why can that difference matter so much? Because investment losses and recoveries are mathematically asymmetric. Consider two hypothetical managers. Manager A captures 110% of both upside and downside. Manager B captures 90% of upside but only 75% of downside.

Now assume the benchmark loses one-third of its value. Manager A loses approximately 36.67%, turning $100 into $63.33. Manager B loses only 25%, leaving $75.

Next, assume the benchmark rallies 52.6%, enough for Manager A to recover completely. With 110% upside capture, Manager A gains 57.9% to get back to $100.

Manager B captures substantially less of that rally – only 90%. Yet because it begins the recovery with $75 rather than $63.33, its 47.4% gain enables it to finish at approximately $110.53.

Manager A captured more upside but merely broke even.

Manager B captured less upside and produced a 10.53% gain. Their clients made more money precisely because they lost less.

That’s the mathematical asymmetry of loss and recovery. A strategy doesn’t necessarily need to capture more of the market’s advances to produce more wealth. It can trail during positive periods and still finish ahead if it preserves enough capital during declines to compound from a larger base.

Manager B’s +15 Net Capture (90 − 75) describes that favorable relationship. The better investment isn’t necessarily the one that captures more. It’s the one that captures better.

Simply put: Reduced Loss = Increased Returns.

For an investment fiduciary, this can be especially relevant because participant outcomes depend on the experience of compounding over time, not simply on a fund’s ranking during one measurement period. A manager that participates reasonably in advances while limiting losses may offer a different risk and return profile than a manager with higher headline returns but greater downside exposure.

Capture Tells Us How Returns Were Produced

Traditional analysis asks: What was the return?

Net Capture asks: How was it produced?

Did a manager outperform by taking more risk, riding a favorable investment style or making a few concentrated bets? Or did it repeatedly participate substantially in market advances while experiencing materially less of the declines?

Those are very different investment characteristics – even when they produce similar trailing returns. And that distinction may help explain why capture has demonstrated information about subsequent performance that prior returns alone have not.

For fiduciaries, capture ratio can fit into three parts of a prudent manager review:

1. Evaluation. During initial or periodic review, the committee can examine upside capture, downside capture and Net Capture alongside fees, risk measures, benchmark-relative returns, portfolio characteristics and qualitative factors. The purpose is to understand the source and consistency of results, not to rank funds by one number.
2. Monitoring. Capture measures can be tracked over rolling periods and compared with a fund’s stated objective and peer group. A material change may prompt questions about portfolio construction, risk controls, personnel, style drift or market conditions. A change alone does not establish that a fund should be removed, but it can help identify when additional analysis is appropriate.
3. Documentation. Investment committee minutes or monitoring reports can record what the capture data showed, how it compared with the fund’s mandate and benchmark, what questions were asked and why the committee concluded that the fund remained appropriate or required further review. This creates a clearer record of the reasoning behind the decision rather than simply noting that a fund had strong or weak trailing returns.

Used this way, capture ratio becomes a diagnostic and documentation tool. It helps fiduciaries ask better questions without turning the metric into a mechanical buy, hold or replace rule.

The Benchmark Matters

Capture is only meaningful relative to the market being captured. A Small Growth manager measured against the S&P 500, for example, may appear exceptional or mediocre simply because small-growth stocks outperformed or underperformed large caps. The capture statistic could therefore reflect style exposure rather than manager effectiveness.

A more meaningful analysis compares a manager with the market it was hired to beat: Small Growth against Small Growth, Large Value against Large Value. Otherwise, the benchmark itself can distort the conclusion and reduce or eliminate its predictive ability.

This is particularly important for investment fiduciaries because the benchmark should be consistent with the fund’s stated objective, investment style and role in the plan’s lineup. A capture ratio calculated against an inappropriate benchmark can create a misleading record and lead the committee to draw conclusions about manager skill that actually reflect asset-class differences.

Fiduciaries should also consider the measurement period, market environment and calculation methodology. Upside and downside capture can vary depending on whether they are calculated monthly or quarterly, over a short or long period and during markets with different patterns of volatility. Those details should be understood and, where material, documented as part of the review.

An Important Tool, Not a Crystal Ball

None of this suggests replacing a fiduciary investment process with a single statistic. Expenses, investment philosophy, process, personnel, organizational stability, diversification, risk, participant needs and other considerations still matter.

Nor does a favorable Net Capture guarantee future outperformance. A fund may have attractive capture characteristics because of temporary positioning, a particular market regime or exposures that are inconsistent with the plan’s objectives. Conversely, an unfavorable period may reflect a deliberate strategy that remains appropriate for the fund’s role in the lineup.

The fiduciary question is therefore not, “Does this fund have the best capture ratio?” It is, “What does this capture profile tell us about the fund, and how does that information fit within our documented evaluation and monitoring process?”

A committee might use capture data to:

• compare managers with similar mandates;
• assess whether downside experience is consistent with the fund’s stated risk profile;
• investigate whether a change in capture reflects style drift or a change in process;
• supplement, rather than replace, fee and performance analysis;
• identify questions for the investment manager; and
• document the basis for continuing to monitor, retain or reconsider a fund.

S&P demonstrates the difficulty of identifying tomorrow’s winners by selecting yesterday’s. Vanguard found that capture contained information about subsequent performance that prior absolute returns alone did not. And Cline and Gilstrap found that the spread between upside and downside capture was significantly associated with subsequent fund performance.

Perhaps the traditional question – “Which manager performed best?” – is, at best, incomplete.

A potentially more useful question is:

“How did the manager produce those returns, and what does that tell us about the fund’s role in the plan?”

Past performance tells us what happened.

Net Capture begins to tell us how it happened – and the evidence suggests that may tell us something about what happens next. For 401(k) fiduciaries, it may also provide a disciplined way to improve manager evaluation, sharpen ongoing monitoring and document the reasoning behind investment decisions – without treating one statistic as a standalone selection criterion.

Research References

1. Vanguard. “Active Investing: Tilting the Odds in Your Favor.” March 9, 2026.
2. Marlo, Timothy, and Jeffrey R. Stark. “Capture Ratios: Seizing Market Gains, Avoiding Losses, and Attracting Investors’ Funds.” The Journal of Investing 29(1), 2019, pp. 80–94.
3. Marlo, Timothy, and Jeffrey R. Stark. “Ability to Capture Up Market Returns and Avoid Down Market Losses: The Upside and Downside Capture Ratios.” SSRN Electronic Journal, 2016.
4. Cline, Brandon N., and Collin Gilstrap. “Active Share: A Blessing and a Curse.” Journal of Financial Research 44(2), 2021, pp. 431–463.
5. S&P Dow Jones Indices. “U.S. Persistence Scorecard Year-End 2025.” May 7, 2026.