Man Group 'Correlation is Enemy of Diversification'

Man Group plc (LSE: EMG) market outlook for 2012.

From the Head of Man’s Multi-Manager business, Luke Ellis, part of a recent interview he conducted. Ellis discussed various topics and had some interesting observations regarding correlation levels with different assets. He thinks the uncertainty regarding Europe is causing correlation levels to remain high.

Presenter: What about the correlations, because that must come into play where there’s a necessity for diversification.

Luke: Sure, exactly. It’s the enemy of diversification. Correlations have been not just unreasonably high but at record levels, both between stocks and across different markets. Some of the amazing correlation statistics you’ve seen was for a good period of September/October, not only were cross-correlations of stocks at sort of 90%+ levels, which basically means everything’s going up together, or up or down together, but also everything, every market, whether you wanted to look at oil, whether you wanted to look at equities, whether you wanted to look at bonds, everything correlated incredibly highly with dollar euro. Basically the European story has been the driver of everything in the markets for the last three or four months. At some point we will either get a resolution, a good resolution or a bad resolution, or maybe they’ll just kick the can far enough down the road that we can’t see it for a bit, that would be enough. That would let, correlations will go down because people will start looking at individual companies, individual stocks, individual bonds, and then you can see an enormous amount of mispricing that’s around in the street at the moment.