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Diversification and dispersion

Summary

We see a greater gap between equity winners and losers, creating opportunities for stock selection. A more unstable relationship between bonds and equities challenges traditional diversification.

What’s changing?

We see a greater gap between equity winners and losers, creating opportunities for stock selection. A more unstable relationship between bonds and equities challenges traditional diversification.

Correlation chaos

Selected cross-asset correlations, 2010–2016

Chart - Selected cross-asset correlations, 2010–2016

Source: BlackRock Investment Institute and Thomson Reuters, November 2016.
Notes: The lines show the rolling 90-day correlations of daily returns. EM equities are represented by the MSCI Emerging Markets Index; commodities by the Goldman Sachs Spot Commodity Index; U.S. equities by the S&P 500 Index, oil by the Brent crude price and U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index.

Dispersion has also picked up. Weekly stock market returns have grown more varied of late, with the gap between the winning and losing quartiles briefly hitting an eight-year high following the US election. This trend could strengthen as the baton is passed from monetary to fiscal policy – in the US and other markets – increasing the value of excess returns that capable active managers might deliver.

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Suggestions for adapting to greater dispersion and portfolio construction challenges: Be innovative to diversify your portfolio

Funds that could help: