How to overcome high correlations

Richard Skelt, co-head of Fidelity's Investment Solutions Group, explains how to achieve diversification when correlations between asset classes are high.

One of the first pieces of advice investors are given is the importance of having a diversified portfolio. The rationale is if the returns on your assets are subject to different drivers, then weakness in one asset should not necessarily be reflected in weakness across the whole portfolio. The most important contributor to the diversification effect of an asset is its correlation to the rest of the portfolio: the lower the correlation, the more diversifying the asset. Experience tells us correlations change over time but over the last few years we have seen a sharp increase in the ...