Less correlation gives stock-pickers opportunity to generate alpha

Decoupling correlations

Decreasing correlations has positive effect on portfolio risk

Stock-picking has been a lot easier this year. Decoupled correlations have allowed good equity managers to generate alpha as movements in equity prices have become more responsive to company fundamentals as opposed to risk-on/risk-off market regimes.

Examining the average correlation between the members of the S&P 500 index reveals that stocks began decoupling in July of 2012 (Figure 1).

The data shows that prior to July 2008 average equity correlations maintained a tame level in the range of 0.1