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Christows wary over growing correlation

The increasing correlation between asset classes could hit fund of funds managers using a multi-asset approach if markets fall, warns Christows.

The firm says multi-asset portfolios have become popular since Ucits III has enabled funds to hold different asset classes.

Head of fund research Dan Kemp says: “The reason why everyone likes multi-asset classes is that they are meant to have low correlation but everything is moving upwards. The problem in the short term will be if this correlation persists when markets start falling. It is all going to fall out of bed.”

Other multi-managers think it is unlikely that increasing correlation will impact negatively on multi-asset portfolios.

Insight co-head of multi-manager Patrick Armstrong says: “I agree that correlation is increasing and this is because everyone is trying to get a return in excess of cash when yields are low. Commodities are performing well at the same time as equities, which is going to have a negative impact on equities at some point.

“But there are some strategies that are not just benefiting from beta, such as directional bond funds. Also, if you look at gold prices in sterling terms instead of the dollar, which is weak, the figures look less dramatic.”

Abbey head of multi-manager John Kelly says: “Asset classes are dynamic but always carefully balanced. Emerging markets, for example, have become more acceptable but they still only have 80 per cent correlation to other markets. Bonds are 50 per cent correlated while cash has no correlation. Now multi-managers have access to Japanese real estate and hedge funds, the range of investments will become wider still.”

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