Canadian large cap growth managers post highest returns in almost two years

Russell Active Manager Report Highlights

  • 74% of growth managers beat S&P/TSX benchmark compared to 45% of value managers
  • 52% of large cap managers beat S&P/TSX benchmark
  • Active managers off to a strong start in 2011

TORONTO, Feb. 2 /CNW/ - According to new data from the Russell Active Manager Report, Canadian large cap growth managers in Canada gained 11.1% last quarter, their highest return since the first quarter of 2009.  That was well ahead of the S&P/TSX Composite Index's return of 9.4% during the same period and ahead of the median value manager's return of 9.1%. 

"The difference in performance between growth and value managers last quarter was also the largest since the second quarter of 2008," says Kathleen Wylie, Senior Research Analyst at Russell Investments Canada Limited (Russell), who has interviewed and evaluated hundreds of investment managers during her career. 

"Growth managers were more favourably positioned in 9 out of 10 S&P/TSX sectors.  Energy and Materials were the top-contributing sectors. Growth managers are slightly overweight Energy and have less of an underweight in Materials compared to value managers."

In terms of stock selection, Canadian Natural Resources and Teck Resources were more widely held by growth managers and at larger weights compared to value managers. Canadian Natural Resources gained 25% and Teck Resources rose 47% in the fourth quarter of 2010.  Growth managers were also helped by owning less Encana and Bank of Montreal in the quarter, which were among the largest negative contributors to the Index return and were more widely held by value managers.

More Large Cap Managers Beat the Benchmark

Overall, 52% of large cap managers in Canada were able to beat the benchmark in the fourth quarter of 2010, up notably from only 34% in the third quarter and 37% in the second quarter. 

"The 52% is in line with the 10-year average. However, it's worth noting that without the underperformance of the dividend managers who struggled significantly in the quarter, the number would have jumped to 62% so we can conclude that it was generally a good quarter for active managers," says Wylie.

"I'm surprised that large cap managers did as well as they did given the strength in the Materials and Energy sectors and narrow sector breadth overall.  Large cap managers are roughly 6% underweight Materials and 2% underweight Energy on average and typically when those two sectors are the top-performing sectors, managers find it a challenge to beat the benchmark, particularly when there is narrow sector breadth. Clearly, even though their sector bets were not rewarded, stock-picking was a driver of individual investment manager returns in the fourth quarter, which is what we expect in the long run."

The median large cap manager's return was 9.6%, slightly ahead of the benchmark return of 9.4%.  The difference between the top-performing and the bottom-performing manager return was over 13%, the widest since the second quarter of 2009 but still below the historical average of 17%.

"The investment managers I met with recently indicated it was a more of a stock-pickers market for active managers last quarter.  They expect the stock-pickers market to extend into 2011," says Wylie.

"If correlations of stocks remain low and company fundamentals continue to be rewarded as we expect, investment managers with skill in stock-picking and portfolio construction should be able to add more value so we expect the difference between the top- and bottom-performing managers to continue to widen." 

2011 Starting On a Positive Note

2011 appears to be kicking off on a positive note for the S&P/TSX Composite Index with strong sector breadth and the Materials sector lagging the benchmark. 

"Since large cap managers in Canada have their largest underweight to Materials, any underperformance of those stocks will help them beat the benchmark," says Wylie.   

The underperformance of gold stocks is also positive for large cap managers in terms of benchmark relative performance.   In the early part of January, gold stocks fell 13% - which helps active managers, who are roughly 5% underweight the stocks on average. 

"Large cap managers have their largest overweights in Consumer Discretionary, Industrials and Information Technology stocks so if the strength in those sectors continues, that should help large cap managers' benchmark relative performance," says Wylie.

"Early indications are that the value style of investing might be more rewarded in the first quarter of 2011 with value managers more favourably positioned in 8 out of 10 sectors compared to growth managers based on sector performance so far in January." 

Wylie thinks the performance of the top three most heavily weighted S&P/TSX Composite (Energy, Materials and Financials) sectors will determine which style will be favoured since the positioning of those sectors is notably different for value and growth managers. 

"Value managers are underweight Energy while growth managers have a slight overweight and growth managers are underweight Financials while value managers are overweight.   Value managers have a larger underweight to Materials, particularly gold, compared to growth managers," says Wylie.

"There's a perception that there's no style in Canada because most managers hold the big banks. However, that's clearly not the case when you dig down into the positioning of value and growth managers' portfolios and compare their quarterly performance. If you look back over the last 20 years, there is no significant difference in performance between the two styles but over shorter time periods, there have some extreme differences in performance and extended periods where one style will dominate.  That's why it's important to have a multi-style approach to investing so that you can diversify your portfolio, reduce risk, and weather the swings in the markets."

For access to the full Russell Active Manager Report, please contact Thien Huynh at 416-640-2529.

About Russell Investments

Founded in 1936, Russell Investments is a global financial services firm that serves institutional investors, financial advisers and individuals in more than 40 countries. The firm has $140 billion in assets under management (as of 06/30/10) in its mutual funds, retirement products, and institutional funds.

Russell Canada was recently named the #1 fastest growing money manager in Benefits Canada's 2010 Top 40 Money Managers Report. For more information about how Russell helps to improve financial security for people, visit us at www.russell.com/ca.

SOURCE Russell Investments Canada Limited

For further information:

Thien Huynh           416-640-2529           thuynh@russell.com

For real-time news updates, follow @Russell_News on Twitter.

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