Where is the diversification?
I just wanted to see where EFA was this morning relative to the SPY given the changes in currencies and economic expectations. To my surprise they are highly correlated nearly one (visual calculation).
What could explain such a high correlation given different currencies, economic cycles, and regulatory schemes?
Off the cuff, I would say SPY companies derive a significant portion of their earning from overseas as does EFA companies. Large Cap companies sell into the same global market, have sophisticated managements that hedge risks therefore little differentiates them except quality of management, why would you expect the outcome to be any different?
As the economy becomes more global the competition that differentiates will be for quality of management, both for the companies and the states in which those companies operate. Investment correlations move closer to one as business cycles converge into a single global cycle.
What could explain such a high correlation given different currencies, economic cycles, and regulatory schemes?
Off the cuff, I would say SPY companies derive a significant portion of their earning from overseas as does EFA companies. Large Cap companies sell into the same global market, have sophisticated managements that hedge risks therefore little differentiates them except quality of management, why would you expect the outcome to be any different?
As the economy becomes more global the competition that differentiates will be for quality of management, both for the companies and the states in which those companies operate. Investment correlations move closer to one as business cycles converge into a single global cycle.
Posted by Bradley Fluetsch at 8/28/2009 6:10 AM 
Categories: Asset Allocation
Tags: correlation profit investing diversification SPY EFA Asset stocks Allocation
Categories: Asset Allocation
Tags: correlation profit investing diversification SPY EFA Asset stocks Allocation
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