Russell Active Manager Report Highlights
76% of Canadian Large Cap Managers outperformed the S&P/TSX Composite
Index - the highest in 7 ½ years
All styles outperform but dividend-focused and value managers pull ahead
Active managers optimistic about 2012
TORONTO, Feb. 1, 2012 /CNW/ - The year ended on a positive note for
large cap Canadian equity investment managers, with 76 percent
outperforming the S&P/TSX Composite Index's return in the fourth
quarter of 2011 - the highest outperformance since the second quarter
of 2004, according to the Russell Active Manager Report. That compares
to only 40 percent who beat the benchmark in the third quarter, which
was a very challenging quarter for many active managers. The median
large cap manager return was 4.7 percent in the fourth quarter compared
to the S&P/TSX Composite's return of 3.6 percent, the largest
outperformance in three years.
"The focus came back to fundamentals, with many of the companies that
were beat up in the third quarter rebounding strongly in the fourth,
primarily in the month of October," highlights Kathleen Wylie, Senior
Research Analyst at Russell Investments. "The market seemed to
recognize that good companies, with good management, trading at
reasonable valuations, should be rewarded."
Wylie points out that many of the top-contributing stocks in the fourth
quarter had experienced significant declines in the third quarter when
the market focused almost exclusively on macro factors. For example,
the top-contributing stock was Canadian Natural Resources, which rose
24 percent in the fourth quarter after falling 24 percent in the third.
As well, Royal Bank of Canada was a top contributor in the fourth
quarter, up nine percent after falling 12 percent in the third quarter.
Other examples of similar situations include Canadian National Railway
Co. and Suncor Energy Ltd.
"These are among the most widely held names by Canadian equity
investment managers," notes Wylie, "so their strong rebound in the
fourth quarter had a significant positive impact on manager returns.
More than 70 percent of the investment managers we research hold
Canadian Natural Resources, Canadian National Railway and Suncor, and
more than 80 percent hold Royal Bank, so those stocks were key factors
in the strong active management environment." The Russell Active
Manager Report covers roughly 140 Canadian Equity money-manager
products and is produced quarterly.
"It was also a case of what managers didn't own that helped them beat
the benchmark in the fourth quarter," says Wylie. "Gold stocks fell in
the fourth quarter, and large cap managers on average were almost six
percent underweight gold stocks at the start of the quarter. So the
decline really benefited their benchmark relative performance." Kinross
Gold was the largest negative-contributing stock in the benchmark
index, falling 25 percent in the fourth quarter. However, only 29
percent of large cap managers held the stock. Agnico-Eagle was the
second-largest negative contributing stock, falling 41 percent in the
fourth quarter, but was held by only 14 percent of large cap managers.
Research in Motion was also a key negative contributor in the fourth
quarter, falling 31 percent. Wylie notes that active managers have been
moving out of the name, but RIM was still owned by 44 percent of
investment managers at the start of the fourth quarter. "At the end of
2010, 66 percent of large cap managers held RIM so that shows how
quickly the tide can change," she says.
Sector positioning had little impact on manager performance in the
fourth quarter generally, with large cap managers on average favourably
positioned in only four of the 10 sectors. "This highlights that it was
all about stock-picking, which is what we believe is the key driver of
performance in the long run," Wylie says.
All Styles Outperform in the Fourth Quarter
All styles of large cap managers beat the benchmark in the fourth
quarter. For the third consecutive quarter, dividend-focused managers
were rewarded most, with 94 percent outperforming the S&P/TSX
Composite, followed by 75 percent of value managers and 59 percent of
growth managers. Those numbers are higher than in the third quarter
when 74 percent of dividend-focused, 30 percent of value, and only 12
percent of growth managers beat the benchmark.
"Since many of the top-contributing stocks were held by managers of all
styles, what differentiated their performance was the gold
positioning," highlights Wylie. "Value and dividend-focused managers
reduced their weight in gold stocks during the third quarter as prices
moved higher, so they became even more underweight, which helped in the
fourth quarter." At the start of the fourth quarter, gold stocks
accounted for almost 14 percent of the index weight and
dividend-focused managers were 11 percent underweight, while value
managers were nine percent underweight. By contrast, growth managers
have increased their holdings in gold so were only one percent
underweight gold stocks, which would have hurt their relative
performance in the fourth quarter.
Stock Picking Still Expected to be Key in 2012
The S&P/TSX Composite has kicked off the year on a positive note, up
almost five percent in the first four weeks of the year. "Active
managers are optimistic that stock picking will continue to be
rewarded," highlights Wylie. "Many companies that are profitable with
solid earnings growth are trading at attractive valuations."
But it is difficult to tell how the active management environment is
playing out so far in the first quarter of 2012, according to Wylie.
"Sector breadth has narrowed and Materials are leading the way in
performance. Normally that indicates a difficult active management
environment but most of the returns I've seen have been ahead of the
benchmark, so stock selection is likely driving performance again."
Sector positioning may be helping growth managers so far in 2012 as they
were more favourably positioned in eight out of 10 sectors compared to
value managers. With the more defensive sectors such as
Telecommunication, Utilities and Consumer Staples all underperforming,
it is likely that dividend-focused managers may be struggling.
"The bottom-line," highlights Wylie, "is that we can't predict which
style is going to be the best performer since it changes
quarter-to-quarter, and often there are extreme differences between the
styles. The year 2011 was fueled by a thirst for yield and mostly
risk-off trades, so dividend-focused managers were the most rewarded. A
multi-manager, multi-style approach to investing will help to weather
For more information on the benefits of active management and for
information on Russell Investments please contact us at 1-888-509-1792.
For institutional clients, please contact us at 1-866-737-2228.
About Russell Investments
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