Multi-asset managers ready shock absorbers as correlations rise

Multi-asset managers are adopting a range of strategies to protect portfolios if asset class correlations begin to break down, turning to sector-specific investments and raising cash.

Equity markets across the globe have been highly correlated since the financial crisis, but now bonds and equities are also moving up in tandem. Over the past six months, the correlation between the IA UK All Companies and IA UK Gilt sectors, which has been slightly negative historically, has risen to 0.97 (where 1 is perfect correlation). Although the modern breed of multi-asset funds are often more complex than traditional ‘managed’ funds, which hold simply bonds and equities, the ‘taper tantrum’ in May 2013 demonstrated how both kinds of portfolios can be caught out by correlations...