Less correlation gives stock-pickers opportunity to generate alpha
Decreasing correlations have a positive effect on portfolio risk. When market correlations shift in magnitude or reverse, it can be tricky to understand how changing risk levels relate to a portfolio
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
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