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Current Views

February 1, 2013: Contracting Correlations

Thoughts from Our Domestic Equity Team

Equity correlations are falling considerably as investors shift their attention from broad macro events to company-specific fundamentals. We find this to be encouraging for a couple of reasons. First, low correlations make for better diversified portfolios. The more that stocks move independent of one another, the more likely it is that their fluctuations will cancel each other out and result in a lower volatility portfolio. We have in fact seen that play out in the market as the daily move in the S&P 500 this year has averaged just 0.42%, the lowest level in 20 years.

Second, we believe that reduced correlations create a more benign environment for active managers like ourselves. When stocks are mostly moving in lockstep based on high level macro events (e.g. the financial crisis, fiscal cliff, etc.), the implication is that company-specific fundamental drivers are having little impact on market prices. This can create a situation in which one may correctly analyze a company, but not be rewarded for it in terms of stock price appreciation. With this in mind, it is not all that surprising that only one in three active managers surpassed their benchmark last year, and only one in five managed to do so in 2011 (as reported by Bloomberg on Jan 28th 2013, citing data from Bank of America). Recent market action suggests that equities could be transitioning into what we would consider to be a more normalized environment in which company-specific fundamentals are again key drivers of stock price. Not only would this enhance the potential for good ideas to generate outsized returns, it would also result in better diversified, lower risk portfolios.

Submitted by: Jason Sheer, CFA – Portfolio Manager



This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages domestic equity, international equity, domestic fixed income, global fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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