Elusive Low Correlations

Two items today from yesterday’s FT Alphaville. One was part of an ongoing dialogue about correlation having increased lately and the extent to which high frequency trading (HFT) and the popularity of ETFs might be contributing to the problem. Concerns over correlation sprang up in 2008 when “diversification didn’t work” and this has been a front burner topic ever since. It will not be a front burner topic forever however. Whether it is HFT, ETFs or something else that has caused correlation to go up it will at some point recede. I’ve referred to this in the past, before the financial crisis, as an ebbing and flowing of correlations. Many things in the investment world ebb and flow and correlation is just one thing that does this. In this case the correlation issue is simply a problem to be solved. A first step that anyone can do is to simply not expect inter-asset class relationships to remain constant. 2008 was a great example of why correlations go up and while the odds are against that magnitude of melt down in so many disparate asset classes it is possible. This is an argument against set and forget, if anyone still does that anymore. One thing I’ve harped on WRT correlations has been the relative ineffectiveness of broad based funds with the idea being that the attributes of components get blended away in a broad based fund or components might be too small to move the needle. As two cases in point of countries I talk about all the time, in the last four years Norway’s OBX is up a little...

Elusive Low Correlations

Two items today from yesterday’s FT Alphaville. One was part of an ongoing dialogue about correlation having increased lately and the extent to which high frequency trading (HFT) and the popularity of ETFs might be contributing to the problem. Concerns over correlation sprang up in 2008 when “diversification didn’t work” and this has been a front burner topic ever since. It will not be a front burner topic forever however. Whether it is HFT, ETFs or something else that has caused correlation to go up it will at some point recede. I’ve referred to this in the past, before the financial crisis, as an ebbing and flowing of correlations. Many things in the investment world ebb and flow and correlation is just one thing that does this. In this case the correlation issue is simply a problem to be solved. A first step that anyone can do is to simply not expect inter-asset class relationships to remain constant. 2008 was a great example of why correlations go up and while the odds are against that magnitude of melt down in so many disparate asset classes it is possible. This is an argument against set and forget, if anyone still does that anymore. One thing I’ve harped on WRT correlations has been the relative ineffectiveness of broad based funds with the idea being that the attributes of components get blended away in a broad based fund or components might be too small to move the needle. As two cases in point of countries I talk about all the time, in the last four years Norway’s OBX is up a little...

Cement ETF?

A while back there was someone at Seeking Alpha who wrote a lot posts with proposed indexes for ETFs. I haven’t seen posts along these lines in a while and while I won’t be doing this often it might be interesting to do this one time or maybe a second time in the future. As you know EG Shares has come out with country funds for infrastructure with another possibly on the way and some of the larger ETF providers have broader infrastructure funds that trade. I am a big believer in this theme and we have exposure for clients. I’ve been friends/acquaintances with a couple of the guys running EG Shares from before the company existed and at one point I jokingly asked if their proposed India Infrastructure ETF should be called the India Cement Fund. In doing some research for this post I would tell my friends at EG Shares (not that they don’t know this) that if they branched out to have infrastructure funds for Egypt, Vietnam or Saudi Arabia, for as many cement stocks in those countries they could be the respective Cement Funds of those countries. It seems as though many countries have at least one big cement company. The first place I looked for names was in single country ETFs and then I just typed cement into Google Finance (not the Google home page) and trolled through the listings. Cement is obviously a sub-set of the infrastructure theme. You probably know this but cement needs to be made locally. Due to the weight it can’t really be shipped that far. There are quite...

Cement ETF?

A while back there was someone at Seeking Alpha who wrote a lot posts with proposed indexes for ETFs. I haven’t seen posts along these lines in a while and while I won’t be doing this often it might be interesting to do this one time or maybe a second time in the future. As you know EG Shares has come out with country funds for infrastructure with another possibly on the way and some of the larger ETF providers have broader infrastructure funds that trade. I am a big believer in this theme and we have exposure for clients. I’ve been friends/acquaintances with a couple of the guys running EG Shares from before the company existed and at one point I jokingly asked if their proposed India Infrastructure ETF should be called the India Cement Fund. In doing some research for this post I would tell my friends at EG Shares (not that they don’t know this) that if they branched out to have infrastructure funds for Egypt, Vietnam or Saudi Arabia, for as many cement stocks in those countries they could be the respective Cement Funds of those countries. It seems as though many countries have at least one big cement company. The first place I looked for names was in single country ETFs and then I just typed cement into Google Finance (not the Google home page) and trolled through the listings. Cement is obviously a sub-set of the infrastructure theme. You probably know this but cement needs to be made locally. Due to the weight it can’t really be shipped that far. There are quite...

Volcano!

You probably missed this because it has gotten so little attention but apparently a volcano has been erupting in Iceland disrupting all manner of air traffic in and around Europe. Ok no more sarcasm. For quite a while now I have been writing about things like toll roads and airports as infrastructure investments. Recently I concluded that toll roads are more like utilities than true industrial stocks as they are usually characterized–still being a legitimate form of infrastructure investing. Investing in publicly traded airports seems like a similar thing. Airports are part of the infrastructure theme and I think a similar type of utility as toll roads. Obviously the volcanic ash has impacted flights and so has impacted airline stocks and to a lesser extent some of the airport stocks I keep tabs on. The chart captures Copenhagen Airport which has symbol KBHL in Denmark and CPNGF on the US pinks, Aeroports de Paris symbol ADP in Paris and AEOPF on the pinks, Fraport symbol FRA in Frankfurt and FPRUF on the pinks, Auckland Airport AIA in NZ and ACKDF on the pinks, Macquarie Airports MAP in Australia and MGPYF on the pinks and the Claymore Airline ETF (FAA). The actual chart may not be of much use but anyone interested can take the symbols, make their own charts and draw their own conclusions. I would expect FAA to be down more than the airports but it looks to me like a couple of the airports are down the same as FAA. MAP is down about as much as FAA and while you might think it odd that an...

Volcano!

You probably missed this because it has gotten so little attention but apparently a volcano has been erupting in Iceland disrupting all manner of air traffic in and around Europe. Ok no more sarcasm. For quite a while now I have been writing about things like toll roads and airports as infrastructure investments. Recently I concluded that toll roads are more like utilities than true industrial stocks as they are usually characterized–still being a legitimate form of infrastructure investing. Investing in publicly traded airports seems like a similar thing. Airports are part of the infrastructure theme and I think a similar type of utility as toll roads. Obviously the volcanic ash has impacted flights and so has impacted airline stocks and to a lesser extent some of the airport stocks I keep tabs on. The chart captures Copenhagen Airport which has symbol KBHL in Denmark and CPNGF on the US pinks, Aeroports de Paris symbol ADP in Paris and AEOPF on the pinks, Fraport symbol FRA in Frankfurt and FPRUF on the pinks, Auckland Airport AIA in NZ and ACKDF on the pinks, Macquarie Airports MAP in Australia and MGPYF on the pinks and the Claymore Airline ETF (FAA). The actual chart may not be of much use but anyone interested can take the symbols, make their own charts and draw their own conclusions. I would expect FAA to be down more than the airports but it looks to me like a couple of the airports are down the same as FAA. MAP is down about as much as FAA and while you might think it odd that an...