Strong Resource-Driven Market Tough to Beat - According to Russell Investments
Russell Canadian Active Manager Report Highlights
- Only 18% of Canadian large cap investors outperformed the S&P/TSX Composite Index in the third quarter
- Surge in gold stocks particularly challenging for dividend-focused managers
- Energy and Materials lagging so far in the fourth quarter points to a more favourable active management environment
TORONTO, Nov. 1, 2012 /CNW/ - It was a good news/bad news story in the third quarter of 2012. The good news is that the S&P/TSX Composite Index rose 7.0% in the period - the largest quarterly increase since the fourth quarter of 2010. The bad news is that only 18% of large cap managers in Canada outperformed the benchmark Index - the lowest on record according to the latest Russell Investments Active Manager Report. That was down from 69% in the second quarter.
"The median large cap manager returned 5.8% in the third quarter, which was a strong return," highlights Kathleen Wylie, Head, Canadian Equity Research at Russell Investments, "but that return was notably behind the S&P/TSX Composite Index's return as most managers struggled to beat the benchmark. For that reason, we describe it as a challenging active management environment."
The Russell Active Manager Report is produced quarterly and is based on recently released data from more than 140 Canadian institutional equity manager products.
With only three out of 10 sectors beating the S&P/TSX Composite Index in the third quarter, the narrow sector performance, led by Energy and Materials, made it challenging for active managers to keep up with the benchmark return. "Large cap managers on average are 5% underweight Materials and nearly 2% underweight Energy stocks, so when those two sectors run, these managers struggle to beat the benchmark," says Wylie. The Energy and Materials sectors combined accounted for 2/3 of the S&P/TSX Composite Index's return in the quarter.
Style Differences Mainly Driven by Gold Stock Performance
Gold stocks rose 18% in the third quarter, the largest quarterly gain since the second quarter of 2010 and following three consecutive quarterly declines. This explains much of the underperformance by active managers. "Large cap managers on average are more than 4% underweight gold stocks so when these stocks surge, active managers tend to struggle relative to the benchmark since gold stocks have such a large weighting in the Index," highlights Wylie. At the start of the third quarter, gold stocks, a sub-sector of the Materials group, accounted for 10% of the S&P/TSX Composite Index, which is down from a peak of 14% three quarters earlier. Dividend-focused managers on average were almost 8% underweight gold stocks, so they were most negatively impacted. That compares to value managers who were roughly 6% underweight and growth managers who were only 1% underweight at the start of the third quarter. Goldcorp Inc. was among the top-contributing stocks in the quarter, with its price rising 18%, and was held by 26% of dividend-focused managers, 34% of value managers and 73% of growth managers.
"All styles lagged the benchmark in the third quarter," highlights Wylie, "but growth managers lagged by less. They were helped by having a slight overweight to Energy and less of an underweight to Materials stocks, including gold." In the quarter, 27% of growth managers beat the benchmark with a median return of 6.1% while only 16% of value managers beat the benchmark with a median of 5.7%.
Not one dividend-focused manager was able to beat the S&P/TSX Composite Index's return in the third quarter. The median return of 4.5% was well behind the S&P/TSX Composite Index's return of 7.0%. Dividend-focused managers tend to have large underweights to resources so the strength in Energy and Materials hurt their relative performance. On average dividend managers were 12% underweight Materials and nearly 4% underweight Energy at the start of the quarter. "The magnitude of underperformance of dividend-focused managers may come as a surprise to many," suggests Wylie, "but keep in mind that these managers tend to have larger sector bets compared to other styles, which can result in larger swings in performance relative to the benchmark. As well, they have performed extremely well since the start of 2011 as investors favoured more defensive strategies."
Environment More Favourable So Far in the Fourth Quarter
The first four weeks of the fourth quarter appear to be more favourable for active managers, with more sector breadth as six out of 10 sectors are ahead. The Energy and Materials sectors are lagging so far in the quarter. "Large cap managers have their largest underweight to Energy and Materials so it helps that these sectors are underperforming," says Wylie. As well, large cap managers on average are overweight the top-performing Industrials, Consumer Staples and Consumer Discretionary sectors so that positioning is benefitting their benchmark-relative performance. "It's too early to make a call on the environment," cautions Wylie, "but with resources, including gold, lagging, it's promising for active managers."
In terms of style, since dividend-focused managers have significantly larger underweights to resources, the environment may be tilted back in favour of their style again. As it stands, they are favourably positioned in eight out of the 10 sectors.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.
Russell has about C$157 billion in assets under management (as of 9/30/2012) and works with 2,400 institutional client and more than 580 independent distribution partners globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 12/31/11). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.5 trillion in 2011 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, 85 countries and more than 10,000 securities. Approximately $3.9 trillion in assets are benchmarked to the Russell Indexes.
Russell is headquartered in Seattle, Washington, USA, and has offices around the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London, Melbourne, Milan, New York, Paris, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow @Russell_News.
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