Correlation can lead to opportunities
Over the last decade, many commentators have argued for reasons why correlations are increasing or decreasing across asset classes. During the financial crisis, many have felt that within the global equity market there was nowhere to hide. An article in the Financial Times (click here – this may require a subscription) goes a long way to explaining the changing correlations.
It is interesting to see the argument put forward that the growth of passive investment vehicles is ‘to blame’ for this increased correlation. We firmly believe that during times of market stress, correlations increase across asset classes and, goodness, we have experienced enough of those times during the last decade. These “interesting times” will not last and correlations will fall, and indeed have fallen, which in turn means that diversification across asset classes should lead to higher risk adjusted rewards.