Chart of the week

Lower correlation, higher opportunity for active managers

This week’s chart looks at declining S&P 500 correlations, which may open the door for active managers to add alpha to a portfolio.

January 15, 2021 | 2 minute read

S&P 500 intrasector correlations on the decline

Source: Bloomberg Finance, L.P., for the three-year period ending January 11, 2021. Based on rolling 30-day correlations between S&P 500 sectors. Historical average based on data from January 1991–December 2019.

  • 2020’s pandemic-induced market plunge took place in record time, with all sectors and virtually all stocks in the S&P 500 declining in unison. The recovery, however, has largely been a different story – one in which certain active investment strategies have been able to thrive.
  • For the first several months of the recovery, the S&P 500 was led by high-flying technology stocks while other sectors lagged. Tech stocks have since remained near the top, but market leadership has shifted violently multiple times, creating an environment ripe for stock pickers.
  • The chart shows how correlations between S&P 500 sectors rose rapidly starting in Q4 2019, with correlations peaking at more than 0.90 in March 2020. As stocks have recovered, however, intra-index correlations have generally been on the decline, recently moving below their 30-year average of 0.50.1
  • As correlations have declined, the door has opened wider for active managers to add alpha (or above-index returns) to a portfolio through in-depth bottom-up research. (Declining correlations may also increase the opportunity for a manager to underperform.)
  • Intra-index correlations could continue to decline if rising rates dampen the performance of rate-sensitive stocks and/or increased regulation under a Democratic-controlled government drags on tech stocks. Against this backdrop, the search for quality active managers who have shown the ability to add alpha over time may be at a premium.

  • Bloomberg Finance, L.P., for the three-year period ending January 11, 2021. Based on rolling 30-day correlations between S&P 500 sectors. Historical average based on data from January 1991–December 2019.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site