Falling Equity Correlations Good for Stock-Pickers

Falling Equity Correlations Good for Stock-Pickers

October 3, 2013
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By Chris Brown, Chief Investment Officer

Below is a Chart from Ned Davis showing daily return correlations for the S&P 500. The idea is that higher equity market correlations indicate a more macro driven, risk on/risk off equity market. It’s a long term chart, starting in the 1970s, and you can see that since the 2008 financial crisis correlations have been a long way above their long term median of 0.47.

However, since the start of 2013 equity correlations have fallen sharply. To us this indicates an environment where it is easier for stock-pickers to make money based on fundamental company analysis without having, say, the latest speech by Mrs Merkel dominating equity market moves. We have seen evidence of this in our client portfolios with our higher conviction stock-picker funds, equity long-short funds and equity trading funds all doing well in 2013.

Given that correlations still sit comfortably above their long term average this trend may have further to run and we are optimistic that our equity trading funds in particular should be able to continue to make money into 2014.