Russell Canadian Active Manager Report Highlights
79% of large cap managers beat the S&P/TSX Composite Index in the first
quarter of 2013
Value style leads again but all styles ahead in the quarter
Market down so far in Q2 but active managers overall outperforming and
TORONTO, May 1, 2013 /CNW/ - The favourable active management
environment that was evident for most of 2012 has extended into 2013
with 79% of large cap Canadian equity investment managers beating the
S&P/TSX Composite Index in the first quarter of 2013, according to the
Russell Canadian Active Manager Report. That compares to 81% in the
fourth quarter of 2012, which was the highest in 8 ½ years. The median
large cap manager return was 4.7% in the first quarter of 2013 compared
to the benchmark S&P/TSX Composite return of 3.3%.
"This sounds like a repeat of what we said a year ago at this time, but
the environment was excellent for active managers in the first quarter
of 2013," highlights Kathleen Wylie, Head, Canadian Equity Research at
Russell Investments. "In fact, taking into account the fourth quarter
of 2012, the back-to-back percentage of investment managers
outperforming the benchmark was the highest since the middle of 2001 -
even better than what we saw last year."
The Russell Canadian Active Manager Report is produced quarterly and is
based on recently released data from more than 140 Canadian
institutional equity investment manager products.
Gold Stocks Made a Difference
Good sector breadth during the first quarter was a key factor with eight
out of 10 sectors outperforming the Index. However, the
underperformance of the Materials sector, specifically gold stocks
within Materials, benefited large cap managers. Gold stocks, as
measured by the S&P/TSX Gold Index, fell 16% in the first quarter, the
largest decline since the third quarter of 2008. That followed a
decline of 13% in the fourth quarter of 2012. The declines in the first
quarter were broad-based with 27 of the 31 gold miners included in the
S&P/TSX Composite Index falling in price.
"The performance of gold stocks has a notable impact on the
quarter-to-quarter relative performance of investment managers in
Canada because it is such a large weight in the benchmark," says Wylie.
At the start of the first quarter, gold companies accounted for 10% of
the S&P/TSX Composite Index, and large cap managers on average were 4%
underweight. With the decline in gold stocks during the first quarter,
the Index weight of gold companies is now below 7%.
"Gold producers still have a large weight in the Index," explains Wylie,
"but it has come down significantly from a peak of 14% in the third
quarter of 2011 when large cap managers were on average nearly 6%
underweight these stocks. Some of the most challenging quarters for
active managers to beat the benchmark since the start of the financial
crisis in 2008 were when gold stocks spiked. "
The largest negatively contributing stock to the S&P/TSX Composite Index
return in the first quarter was Barrick Gold, which fell 14%. It was
held by 46% of large cap managers in Canada. Goldcorp was also among
the top five negative contributing stocks, and was held by 55% of large
cap managers. Eldorado was a significant detractor in the first quarter
when it fell 24% but was only held by 16% of large cap managers. Of the
top 10 negatively contributing stocks, seven were gold companies. This
benefited many investment managers who were void or underweight most of
these names, especially value and dividend managers.
The top contributing stock in the quarter was Canadian National Railway,
which rose 13%. The stock is widely held by 68% of large cap managers,
who were slightly overweight on average, thus helping their
benchmark-relative performance. The second-largest contributing stock
was Valeant Pharmaceuticals, up 29% in the first quarter, but it was
only held by 34% of large cap managers.
All Styles Outperform but Median Value Manager Return Leads Again
For the second consecutive quarter, all styles of large cap managers
outperformed the Index. In the first quarter of 2013, the median value
manager returned 5.6% compared to the median dividend-focused manager
return of 5.3% and the median growth manager return of 4.3%. In terms
of percentage of managers beating the benchmark, dividend-focused
managers led the others, with 86% ahead compared to 85% of value
managers and 75% of growth managers.
Value managers benefited from having large overweights to the
Information Technology, Consumer Discretionary and Consumer Staples
sectors, which all outperformed. Dividend-focused managers were helped
by their overweights to the Industrials, Telecommunication and
Financials sectors, which also outperformed. Growth managers have been
hurt by their underweights to Financials and Telecommunications but
helped by their overweight to the Energy sector, which outperformed in
Small Cap Managers Well Ahead
Although the S&P/TSX Small Cap Index return of 0.6% lagged the S&P/TSX
Composite return of 3.3%, small cap managers added value against both
their benchmark and large cap managers in the first quarter. The median
small cap return of 5.4% was ahead of the median large cap return of
4.7%. Small cap managers have notably larger weights in the
Industrials, Consumer Discretionary and Information Technology sectors
compared to large cap managers and those three sectors were strong
performers in the small cap space, which benefited small cap managers.
In the S&P/TSX Small Cap Index, the Energy and Materials sectors were
the only two sectors that declined, but those two sectors combined
account for nearly 58% of the Small Cap Index weight. Small cap
managers on average were 3% underweight Energy and 11% underweight
Materials at the start of the first quarter, which benefited their
benchmark-relative performance. Note that small cap managers have
outperformed the S&P/TSX Small Cap benchmark for nine consecutive
quarters. In most of the quarters, the Energy and Materials sectors
underperformed so that has helped this benchmark-relative performance.
"There is significant alpha potential in small cap space," highlights
Wylie, "with the median small cap manager ahead of the S&P/TSX Small
Cap Index on average by140 basis points per quarter over the last 10
Small cap managers tend to outperform large cap managers as well, with
the median small cap manager return on average almost 80 basis points
ahead of the median large cap manager return on average per quarter
over the last 10 years. "There is definitely more volatility in small
cap manager returns compared to large cap managers," says Wylie, "but
investors with a long-term focus should consider a small cap manager
allocation given their value-added potential."
Optimism About the Active Management Environment Continues
Although the market is struggling so far in the second quarter, with the
S&P/TSX Composite down 4% led by Materials, including golds, the
environment looks favourable for active managers in terms of
benchmark-relative performance. Sector breadth is very good with nine
out of 10 sectors outperforming.
"It's too early to call for sure," says Wylie, "but based on sector
performance so far in the second quarter, active managers are
favourably positioned in six out of 10 sectors. In terms of style, the
environment seems to be tilted toward dividend-focused and value
managers again but that changes every day. Growth managers now have a
slight overweight in the Materials sector so if those stocks continue
to underperform it will weigh on growth manager performance. Growth
managers also have an overweight to Energy stocks, while value and
dividend managers are underweight so the performance of those stocks
will have a notable impact on relative style performance as well."
Active managers are optimistic that the favourable environment will
continue. "In our recent discussions with investment managers in
Canada," Wylie says, "they note that stock correlations and volatility
are lower now compared to what was observed in many periods since the
start of the financial crisis in 2008. They highlight that the market
is more focused on the fundamentals of companies and less on
macroeconomic issues. The fact that the situation in Cyprus did not
send the market back into crisis mode is a good sign. If that had
happened a year ago, it might have had a much larger, prolonged
negative impact on the market. It's never going to be a smooth ride for
active managers, but the environment is certainly more favourable."
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.
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