Diversification a Hedge?

[nwsteve]

Studyjust released by Merrill Lynch indicates that nearly all asset classes are now well correlated with S & P 500. Only consumer products seem to be counter-cylclical.  Apparently much of this alignment has happened in last 5 years
Where does that leave the individual investor in search of a financial cushion? The Merrill researchers say bonds remain a good bet to rally when U.S. stocks sink. Another potential source of diversification is consumer-staples stocks. Consumer staples have become the only stock market sector less correlated to the S&P 500 today than in 2000. The reason: oil- and technology-obsessed investors have no interest in Tide or toothpaste, which is why stocks like Altria (Research), Proctor & Gamble, (Research) and Wal-Mart are stuck in neutral despite fine fundamentals.
http://money.cnn.com/magazines/fortune/fortune_archive/2006/05/15/8376864/index.htm

Looks like a time to revisit asset categories.  Isn't there an ETF that sector specific to Consumer Products?  I know Fidelity has a sector fund for the category.  Or do you buy P &G and enjoy the dividends.
nwsteve

 

[brewer12345]

"Hedge funds aren't hedging much any more
This is particularly ironic for hedge funds, given their name. "Fewer and fewer hedge funds are doing what hedge funds are supposed to do, which is provide uncorrelated returns," says Pinkernell.

It's not that veteran hedge fund managers forgot how to do their jobs. The problem is that the huge sums flowing into alternative investments have given rise to a new breed of hedge fund, one that's a gussied-up mutual fund masquerading as a hedge fund to collect gaudier fees.

"If you think your hedge managers are just providing you with what you could get with an S&P index fund, then absolutely you should not be paying fees of 1.5 percent [of assets] and 20 percent [of profits]," says Tim Jackson, head of hedge fund research for Rocaton Investment Advisors."


I would actually suggest that this is a poor explanation. More likely, there is so much pressure on hedge fund managers to deliver return that they have been less and less willing to short stuff in a generally rising market. Foolish on both the client and the manager's part. The clients are foolish to push returns over risk control and hedging. The managers arre foolish to give in to the pressure.

 

[Nords]

Studyjust released by Merrill Lynch indicates that nearly all asset classes are now well correlated with S & P 500. Only consumer products seem to be counter-cylclical. Apparently much of this alignment has happened in last 5 years

I think more people are beginning to understand that correlations change over time. IOW correlations don't stay correlated. I didn't expect them to move this quickly, though-- I wonder if higher volatility & financial velocity is speeding up everything?

The Merrill researchers say bonds remain a good bet to rally when U.S. stocks sink.

No kidding, Merrill-- really?!? I wonder how much people pay for that insightful analysis?

Another potential source of diversification is consumer-staples stocks. Consumer staples have become the only stock market sector less correlated to the S&P 500 today than in 2000. The reason: oil- and technology-obsessed investors have no interest in Tide or toothpaste, which is why stocks like Altria (Research), Proctor & Gamble, (Research) and Wal-Mart are stuck in neutral despite fine fundamentals.
Looks like a time to revisit asset categories. Isn't there an ETF that sector specific to Consumer Products? I know Fidelity has a sector fund for the category. Or do you buy P &G and enjoy the dividends.
nwsteve

Either buy iShares' "Dow Jones U.S. Consumer Goods Sector Index Fund" (IYK) (of which P&G comprises 15%), individual stocks trading at multi-year lows, or the Fidelity sector fund, or... Berkshire Hathaway. It's interesting to note how many of BRK's stock holdings mirror the IYK ETF and how many more "boring" consumer-products companies they own outright.

But all of the above, Berkshire included, seem to be trading at or near multi-year highs.