RT Journal Article SR Electronic T1 Cross-Sectional Equity Correlations and the Value of Active Management JF The Journal of Index Investing FD Institutional Investor Journals SP 52 OP 66 DO 10.3905/jii.2020.1.089 VO 11 IS 1 A1 Gregg S. Fisher A1 Michael B. McDonald A1 Steven E. Kozlowski YR 2020 UL https://pm-research.com/content/11/1/52.abstract AB This article examines the cross-sectional correlations among equities and relates them to the performance of actively managed mutual funds. When the average correlation between equities’ returns is higher, there is less opportunity for active management to outperform. Consistent with this, the authors find that actively managed mutual funds generate lower abnormal returns when the average cross-sectional correlation is high. This result holds for both small and large funds, within various subperiods, and when controlling for fund fixed effects. The authors’ results have implications for investor portfolio allocation during periods such as the 2020 COVID-19 panic.TOPICS: Factor-based models, mutual fund performanceKey Findings• The average correlation between the returns of each individual stock and the market varies over time and influences the opportunities for active management.• We find evidence of stronger average equity mutual fund performance when the average correlation across publicly traded equities is low.• The impact of return correlation on fund performance is greatest among funds with low total net assets, which are less impacted by liquidity effects.