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By Jeremy Glaser and Shannon Zimmerman | 04-19-2013 01:00 PM

No Shortage of Investment Challenges Today

From high correlations to macroeconomic uncertainty to rock-bottom interest rates, investors face a large number of headwinds today, says Morningstar's Shannon Zimmerman.

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. We’re looking forward to the 25th Morningstar Investment Conference this June. The landscape that investors face right now is one of the most challenging in the quarter century that we’ve had this conference. I’m here today with Shannon Zimmerman, associate director of fund analysis here at Morningstar, to look at some of these challenges. Shannon, thanks for joining me.

Shannon Zimmerman: Good to be with you, Jeremy.

Glaser: So let’s start with correlations. This has been kind of one of the big stories since the financial crisis. Different asset classes have been much more correlated to each other than they have been in the past; all stocks kind of move in lockstep instead of potentially security selection being more important. Why is this a challenge for investors?

Zimmerman: In some cases it’s not even just stocks or certain movements that are highly correlated within an asset class, but even across asset classes you’re seeing higher levels of correlation, as well. It’s a challenge because it becomes much more difficult for investors to achieve effective diversification in their portfolios. I mean, why do you want diversification? Not just for the sake of having your assets dispersed across a number of asset classes, but so that one part of your portfolio will move in a different way. And when one part of the portfolio is up, the other will be down, and vice versa. It’s harder to do that now for lots of reasons. A colleague of mine, Kevin McDevitt, has done some research and has put out a pretty good argument that one of things that’s going on is that with the rise of passive investing has come a greater level of correlation because more and more people are investing in the market. So you get the market's return. When all that money is going behind passive vehicles, it’s easier for correlations to get tighter and tighter.

So one of the ways that we’re going to try to address that at the conference is to talk with Bill Nygren of Oakmark and Steve Wymer of Fidelity. They come to investing from very different perspectives. Nygren is a value hound; Wymer is a growth investor. But they have one thing in common at least, and that's that they have achieved pretty impressive returns over the course of many years with portfolios that don't look at all like their benchmarks. So that's an opportunity for investors, particularly investors who are paying a premium in terms of actively managed funds. They’re not just investing in the index. They’re investing for the sake of getting a premium on their returns, something higher than they would get with an index fund that would cost a fraction of what they are paying. So these managers have done quite well, as I say, with portfolios that aren't as closely correlated as most are with the broader equity markets.

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