Correlations and Fund Returns

For the 2011 calendar year, just 23% of mutual funds outperformed their benchmark. The correlation between the S&P 500 and the stocks within the index averaged a record 86% (0.86) for the year. Some argue that a high correlation makes it harder for a mutual fund manager to pick winners.  During the decade 2002-2011, the average correlation between stocks in the S&P 500 and the index itself averaged 56% (0.56). However, during most years, large cap managers have lagged their benchmarks when correlations were high and when correlations were low. For 2011, the best performer in the S&P was Cabot Oil & Gas (> 100% return) while the biggest loser was Bank of America (-58%). Less than 820 funds owned Cabot while over 2,460 funds owned B of A.