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April 06, 2005 at 08:00 PM
March was a particularly onerous month for investors, but even more cruel for those who believe in the power of diversification.
Virtually all asset classes were down last month. As March progressed, it seemed like every sector of the market that exhibited strength earlier in the year — including large cap growth, and sectors such as utilities, basic materials, and energies, slipped into the red. Alternative investments such as hedge funds and managed futures didn’t offer much of an oasis either.
There are several reasons why all asset classes became highly correlated as their prices headed lower. Credit spreads widened significantly after GM announced a huge first quarter earnings miss, which shock investor confidence to the core. If the $300 billion in GM bonds are downgraded to junk status–a scenario that is quite plausible–it would rock the high yield market to the core.
The problem migrated to the higher end of the credit curve as well. AAA spreads against Treasuries also widened, which translated into losses for holders of Lehman aggregate-pegged mutual funds. There simply was not any place to hide in March.
