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Fund Spy

Fun With Mutual Fund Correlation Matrixes

Figure out which funds add diversification and which are simply duplication.

Even if you invest through a mutual fund supermarket, you probably own at least a couple of funds from the same fund family. There's nothing wrong with that, but when funds share the same analysts and the managers work together, you can end up with funds that behave similarly.

If the funds are moving in lock step, you aren't getting much diversification from that second fund. This is where the correlation matrix comes in. It's something you can run in Morningstar Direct, our institutional-level software platform. It looks at how closely fund returns have tracked one another over the trailing three years. I've run three special correlation matrixes to help you build a portfolio. You can look to see which funds have the highest correlation so that you know which ones are most duplicative. You can also look at which have the lowest correlation so you know which have the greatest diversification.

I wouldn't buy based simply on that. You also want good funds rather than just those that offer simple diversification. (Click on each fund company name below to see the correlation matrix.)

T. Rowe Price 
Let's start with T. Rowe Price's U.S. stock fund lineup. I have plugged in 15 of its largest actively managed U.S. equity funds. Let's start at the top with  T. Rowe Price Blue Chip Growth (TRBCX). Scroll down column 1 and you'll see that  T. Rowe Price Growth Stock (PRGFX) is a tight fit with a 1.00 correlation--the highest it can get. So, we know that owning those two large-growth funds is rather redundant. Scroll down further and you'll see that  Small-Cap Value (PRSVX) has the lowest correlation at 0.91--thus, it's a good choice for diversification purposes.

For  Equity-Income (VEIPX) in line 6, Value is the tightest fit, and the aggressive New Horizons at 0.92 is the least like Equity Income.

Next let's take a look at Janus where you have a distinctive growth shop in Denver and a strong value operation under the Perkins name in Chicago. No big surprise that  Janus Fund (JANSX) has a high performance correlation with  Janus Twenty (JAVLX) (0.98) and a rather low one with  Perkins Small Cap Value (JSCVX) (0.91). But it is surprising that its correlation with  Janus Triton (JATTX) (0.91) is just as low as its correlation with Perkins Small Cap Value and that Global Life Sciences (JAGLX) is even lower (0.82). As Kathryn Young explains in her analysis, Triton is more risk averse than the typical Janus fund, and its focus on smaller companies has meant it has had little overlap with Janus. The correlation matrix also tells me that tech is a much bigger driver of Janus' big growth fund portfolios than health care as  Global Tech (JAGTX) has much higher correlations with those funds than does Global Life Sciences.

Finally, how about a look at Fidelity with its array of U.S. equity funds? Let's start with  Fidelity Contrafund (FCNTX) because so many people own it. For starters, it's interesting that  Growth Company (FDGRX) is the only fund with a really high correlation at 0.98. It illustrates that even with the same inputs and a massive asset base to run, Will Danoff can still carve his own path. Contrafund also has the same 0.95 correlation with  Low-Priced Stock (FLPSX) and  Magellan (FMAGX) even though Magellan and Contrafund are both in large-growth while Low-Priced is in mid-blend. But the fund's performed least like Chuck Myers'  Small Cap Value (FCPVX) and  Small Cap Discovery (FSCRX). Myers is a Buffett-influenced value investor who really stands out at Fidelity, and his funds make a lot of sense for diversifying a large-growth-tilting Fidelity portfolio.

Conversely, Fidelity Fund has rather high correlation figures with nearly every fund other than Myers’ funds. That leads me to wonder if manager John Avery places similar trades to other Fidelity managers and thus ends up making the fund act like a fund with more asset bloat than it would appear from the $5 billion assets under management. Or it could be by design, as Avery runs the fund pretty close to the S&P 500.

Another Angle on Similarity
You can also put funds to the test by using our Portfolio Manager tool and testing for stock intersection. Enter two or more funds into a new portfolio and then select  X-Ray and then stock intersection. This will show you how closely the funds' actual holdings are repeated.


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Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.