Portfolio Considerations

When creating an investment portfolio, one needs to consider the projected interaction between asset classes that comprise the portfolio. In theory, one should create a portfolio such that when one asset class drops in value, another asset class in the portfolio rises in value. This has the effect of lowering the overall volatility of the portfolio. The statistical metric that measures this interaction is called correlation. The correlation metric ranges between -1 and 1 with 1 representing assets that move exactly in sync with each other and -1 representing assets that move exactly opposite of each other. The chart below provided by NAREIT provides correlations between asset classes as of January 2014.

The chart shows that the correlation between U.S. Equity REITs, in which Magnolia’s Alpha fund invests, and U.S. Large-Cap Stocks is 0.60. This indicates that an investment in Magnolia’s Alpha fund would add significant diversification to an existing portfolio of U.S. Large-Cap Stocks and reduce the overall portfolio volatility.

asset class correlations