Understanding Market Cycles and Fund Performance

Updated on

“There is no standard definition of a market cycle. However, the essential ingredient for the way Royce defines a market cycle is that the time period needs to encompass both a bull market and a bear market.

While each stock market cycle is unique, we define them as those that have retreated at least 15% from a previous market peak and have rebounded to establish a new peak above the previous one. Each market cycle contains a peak-to-trough and trough-to-peak period.”

Market Cycles Give a Fuller Picture

“Measuring performance over market cycles demonstrates a manager’s ability to add value through various market environments, both good and bad.

In contrast, calendar-year periods or trailing one-, three-, or five-year periods are likely to be dominated by either a bull market or a bear market—not always both.”

“Using market cycles helps to give a fuller picture by reducing some of the influence of a bull or bear market period.”

Market Cycle Periods Vary Among Different Asset Classes

“Market cycle periods may vary for different asset classes, such as large-cap stocks, small-caps, international stocks, and bonds.

When evaluating a manager’s market cycle performance, it’s important to use the appropriate cycle period for the asset class in which the manager is investing.”

Understanding Market Cycles and Fund Performance

“Common sense tells us that performance should be measured over a full range of market environments. While one market cycle may look somewhat different than the next, understanding the different stages of a market cycle can also help you monitor the short-term performance of a portfolio manager without losing a clear long-term perspective.

Accepting the reality that there will be periods of relative underperformance during certain market cycle stages can help investors avoid changing managers at what may then prove to be the wrong time.”

Via TheRoyceFunds

Leave a Comment