PSigma's Becket: All asset classes could fall in unison in 2011

Asset class correlation risk has never been higher and markets could fall in unison in 2011, warns PSigma CIO Tom Becket.

The CIO worries the rises seen across all markets in the past 12 months could mean all asset classes have the potential to move together in a downwards direction in the short-term.

He says: "After all asset classes did very well in 2010, we are cognisant that there is the potential for a similarly uniform relationship should markets start to fall this year.

"Given the abundant liquidity that is currently coursing through the veins of markets, correlation risk has probably never been higher, and that makes asset allocating extremely challenging."

Becket says he has been searching hard for assets that he believes can offer genuine diversification.

He has begun the year with a pro-risk bias to his Balanced Managed Fund of Funds vehicle, despite concerns on inflation, slowing global recovery and elevated unemployment rates.

However, due to high cross-asset correlation he anticipates a high turnover on the fund in the coming year, which could result in quite a different stance and portfolio.

"Whilst we agree with the enthusiastic consensus at the outset of the year, we would not be surprised to see us change tack many times in the volatile and uncertain year ahead. We could end the year with a far greater emphasis on capital preservation and defence.

"This might leave us under-exposed to risky assets should the ebullience of the last few years continue, but it will allow us to safeguard the hard-won gains of the recent past, should markets come under renewed pressure," he adds.