Bear-Market Rankings

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Bear-Market Rankings

Bear market rankings compare how funds have held up during market downturns over the past five years. This measure is unlike the others presented thus far, because it examines performance only during the times in which investors may face the largest potential for losses—during downturns, or corrections, in the market.

How Morningstar sees bear markets

A bear market is officially defined as a sustained market correction, but for the purpose of these rankings, Morningstar identifies "bear-market months" that have occurred in the past five years. For stock funds, it considers any month in which the S&P 500 Index lost more than 3% to be a bear-market month. For bond funds, it counts any month in which the Bloomberg US Aggregate Bond Index lost more than 1%.

The method

To generate the current bear-market rankings, Morningstar simply totals each fund’s performance during bear-market months over the past five years and separates them into 10 groups, from those with the most aggregate losses to those with the least. Funds with ranks of one or two withstood bear-market months better than those with ranks of nine or 10. If a stock fund receives a rank of 10, its performance during the bear-market months was among the worst 10% of all stock funds. A bear-market rank of 1 indicates that a fund ranked among the top 10% of all stock funds during those bear-market months. These scores can help you analyze which funds could hold up well should the market undergo another correction.

There are drawbacks, though

Bear-market rankings have two major drawbacks. First, these measures let you know how a fund performed only during certain time periods. Although it’s helpful to know how your fund performed during these market downturns, the fund could certainly lose money—lots of it—during a market upturn, too. Gold funds, for instance, often earn decent bear-market ranks, but they lose money at other times and are not considered low-risk investments.

The second drawback to bear-market rankings is that not all bear markets are the same. The next market correction may be caused by different economic forces than those that led to the previous one. Hence, funds that held up well in one bear market may not do so well in the next. Conversely, funds that were pummeled the last time around might shine in the next bear market.

A caveat on risk

All of the risk measurements we’ve discussed are based solely on past performance. By definition, they fail to account for any future risks a fund might harbor. For example, a fund that used to own mostly low-key large-company stocks may now be heavily invested in smaller companies, and therefore it may be taking on more risk than its historical measures show. Given this limitation, remember that statistical risk measures are a good way to begin understanding a fund’s risk, but they’re not guarantees of safety.