The Search for Consistently Uncorrelated Assets

Are you worried about your stock-market exposure? Buy into something even more bubblicious: natural resources! That seems to be the message of a recent article in the Journal of Financial Planning by William Coaker. Coaker went searching for one of the holy grails of the investing universe: low correlation. (Remember, “uncorrelated assets are now correlated".)

The dataset he used goes from 1970 only until 2004, so it might well miss out some of the more recent volatility in correlation. But even stopping at 2004, Coaker concludes that it's not enough to invest in uncorrelated assets; you have to invest in consistently uncorrelated assets. And if you want a consistently uncorrelated asset to offset your US equity exposure, the best thing he can find for you is natural resources.

Natural resources have had a correlation of less than .20 to all 17 other assets in this study, with the highest being just .19, for both small growth and small value. Natural resources have had the lowest average correlations—and the most consistently low correlations—to every asset in this study, including every category of stocks, bonds, and alternatives. Hence, natural resources have provided more diversification benefits than every other asset in this study. Of special note, natural resources have had a negative correlation 83 percent of the time to U.S. bonds, due to their inverse relationship to inflation.

I would dearly love to see how that correlation has held up since 2004, though. All good things – including low correlations – must come to an end at some point.

(Via World Beta, via Abnormal Returns)