Perspectives Blog

Correlation’s essential role in diversification

Columbia Management, Investment Team | December 5, 2013

…rategies 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 expression being “Don’t put a…

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

…nvestments to your portfolio. While this is true, the degree of risk reduction benefit depends directly upon the correlation of the portfolio’s assets. Correlation is the measure of how assets move relative to each other, usually in response to changing economic and market conditions. Highly correlated assets will more often move in unison (e.g., increase or decrease together), while assets with low, zero or negative correlations will behave more…

Take an active approach to selecting your active manager

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

…ted in the post-crisis years (Exhibit 1). We have already begun to see improving results from active managers as correlations have fallen to post-crisis lows (despite remaining above the longer term averages). Exhibit 1 Sources: Columbia Management Investment Advisers, LLC, S&P Capital IQ, Russell and Morningstar. The correlation long-term average timeframe is January 1990-March 31, 2014. Past performance does not guarantee future results. A…

Duration for diversification

Columbia Management, Investment Team | November 19, 2013

…previous example. When expected Treasury returns fall, the optimal portfolio duration also falls. However, when correlations between Treasury and equity returns decline (become more negative), the optimal duration rises. At very low correlations, expected Treasury returns matter very little (the lines are clustered closely together) because the benefits from diversification easily outweigh the costs. This means that it can be worth investing in…

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

Infrastructure investments may offer stable cash flows and diversification from more cyclical investments Infrastructure investments span the emerging and developed markets across many industries Today’s current market environment offers unprecedented opportunities for well-resourced investors Infrastructure represents the foundation for our day-to-day lives—the societal staples we rely on. And the stable fundamental demand drivers of infrastr…