A technical note today.
Correlation……. is a statistical measure that indicates the extent to which two or more variables fluctuate together. A positive correlation indicates the extent to which those variables increase or decrease in parallel; a negative correlation indicates the extent to which one variable increases as the other decreases.
In the unit trust investment world, if you are investing via a couple of different fund managers, it is sometimes good to have some level of uncorrelation between the funds you’re using, so that in different market conditions one fund might give you something positive when the others don’t.
As an example, Allan Gray’s Balanced fund is correlated with Coronation’s Balanced Fund to the tune of about 70%. Meaning the companies owned and the strategy of the funds have a fairly high level of correlation, but there is some variance.
However, Allan Gray’s balanced Fund has only got a 45% correlated with Marriott’s Balanced Fund. (Coronation about 48%) This means there is quite a difference between the management strategies, the companies owned, or percentages of them owned, and thus the funds could perform quite differently in the swings and movements of the markets, one fund not experiencing all the ‘downs’ when the other might. And so forth.
Good to have some differences of correlation in your portfolio in the savings years of your life.