Lower Correlations Helping Asset Managers

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RBC Capital Markets study suggests more asset managers may outperform

The most recent RBC Capital Markets study concludes that a decline in correlations may be followed by more active managers outperforming their benchmark, if history is any indication. According to Eric N. Berg, CPA, analyst at RBC Capital Markets, the managers that will benefit the most from lower correlations are Invesco Ltd. (NYSE:IVZ) and Waddell & Reed Financial, Inc. (NYSE:WDR). Both firms are more focused on picking stocks than their peers. Correlations have declined by 33% in stock markets since November 2011. The RBC Capital Markets study notes that stock market correlation is 60%. The study’s analysis suggests that if stock market correlation falls to 50%, average level before the global financial crisis in 2007-2008, even more asset managers could outperform their benchmark. RBC analysts estimate that 48% of active managers could outperform their benchmark in this scenario.

The study finds that 40.5% of managers outperformed their benchmark year to date as of May 2014. RBC Capital Markets analysts foresee this percentage rising to 42% based on the historical relationship between correlations and managers’ excess returns. Performance improvement could lead to new money deposited with active asset managers benefiting Invesco Ltd. (NYSE:IVZ) and Waddell & Reed Financial, Inc. (NYSE:WDR).

Higher correlations dampen asset manager performance

Asset managers argued that rising correlations drove underperformance relative to benchmarks during the global financial crisis in 2007-2008 and the European sovereign bond crisis in 2011-2012. The most recent RBC Capital Markets study studied this premise and found support for it. Analysts studied history for 20 years and found that in most cases the number of managers posting excess returns declined when correlations increased in stock markets. Conversely, more managers reported excess returns when correlations declined. Study shows an inverse correlation between correlations and excess return of asset managers.

Invesco and Waddell Reed Correlations


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