Active Managers Beware: Even Correlation Crash May Not Save You

  • Goldman to UBS say breakdown will favor active stock investors
  • More than half could still underperform, if history is a guide

Dow 20,000: Fundamentals or Trump Expectations?

Stock pickers hoping to revive their fortunes on the back of a collapse in equity correlations should probably look away.

While analysis shows active managers performed better in the seven years before the financial crisis, when correlations were on average 31 percent lower than the period since 2008, more than half of them still failed to beat the benchmark. Since the crisis, it’s been more like two-thirds.

  • Pair-wise correlations for large-cap U.S. stocks averaged about 0.31 from 2000 to 2007, and 45 percent of managers beat their benchmark.
  • From 2008 to 2016, correlations averaged about 0.45 and 33 percent of large-cap fund managers beat the market.

Analysts from Goldman Sachs Group Inc. to UBS Group AG have hailed the prevailing trend in stock markets -- more sector and company-specific moves -- as an improving environment for stock selection. But if the chance of pickers beating the benchmark doesn’t get much beyond a coin toss, a reversal of the decade-long exodus of cash -- investors pulled $264 billion from actively managed U.S. equity funds in 2016 -- seems unlikely.

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