Perspectives Blog

Correlation’s essential role in diversification

Columbia Management, Investment Team | December 5, 2013

Diversification strategies can help mitigate overall portfolio volatility. An important component of diversification strategies is correlation, or the measure of how one security moves in relation to another. Portfolios with lower correlation among assets will experience less overall volatility, even if the underlying assets are equally volatile individually. Most investors have heard about the concept of diversification, the typical expressio…

The end of “risk-on/risk-off”

Anwiti Bahuguna, Ph.D., Senior Portfolio Manager | February 3, 2014

The recent decline in cross-asset correlations may offer better investment opportunities for active managers Lowering both cross-asset correlations and inter-asset correlations provides potential benefits for structuring multi-asset portfolios Active managers should seek non-traditional diversifiers of portfolio performance and remain flexible A notable event of 2013 was the remarkable decline in cross-asset correlations implying potentially b…

Holding multiple investments does not ensure better diversification

Columbia Management, Investment Team | April 23, 2014

The degree of risk reduction benefit in diversification depends directly upon the correlation of the portfolio’s assets. Adding just one zero-correlated asset to a portfolio reduces risk 29.5%, while adding a thousand 66%-correlated assets reduces risk by only 19%. Well-designed absolute return products can be meaningful additions to traditional allocations, substantially enhancing diversification. By Todd White, Head of Alternative Investment…

Take an active approach to selecting your active manager

Robert McConnaughey, Director of Global Research | April 7, 2014

Be sure the manager takes enough risk Be sure the manager takes intentional, well-informed risk Be sure the manager has delivered returns for that risk taken across multiple backdrops For some time, we have written about the challenges active equity managers face from a market with unusually high cross-correlations. We have also stated our belief that the correlation pendulum would swing back to more normal levels (at least) as the aftershocks…

Duration for diversification

Columbia Management, Investment Team | November 19, 2013

Many investors struggle to determine the appropriate amount of bond duration in an environment of rising interest rates. The right amount of duration has to be considered in a portfolio context, because the main value of duration exposure comes through diversification. Because of the negative correlation between duration and the returns of riskier assets, high-quality fixed income will still be a cornerstone of any disciplined portfolio. By Za…

Lower intrastock correlations favor alpha strategies

Columbia Management, Investment Team | May 14, 2014

From the Columbia Management Quantitative Strategies Equity Research Group 10-year timeline: Four periods of correlations and alpha 2003–2013 A: The pre-crisis period — Prior to the financial crisis, intrastock correlations were the lowest in the last 10 years, and for most of this time alpha was positive. B: The financial crisis — Unsurprisingly, alpha was worst during the 2008–2009 crisis. Surprisingly, given the breadth of the eq…

Opportunities in global infrastructure

Peter Santoro, Senior Portfolio Manager | February 3, 2014

…ver seen. Furthermore, in a market environment that is seeking growth, yield, and diversifying sources of each, infrastructure assets can be very attractive. Returns from infrastructure related securities have exhibited a low correlation to generic fixed-income and equity investments. Those seeking stable free cash flow and a hedge on inflation are also often attracted to infrastructure investments. Because many infrastructure companies are highl…