Stock Pickers' Pain Turning to Gain According to Russell Investment Manager Report

Russell Active Manager Report Highlights

  • Canadian large cap investment managers struggle to beat S&P/TSX Composite Index in the third quarter but see better environment in the fourth quarter
  • Only 12 per cent of growth managers and 30 per cent of value managers outperformed in third quarter

TORONTO, Nov. 2, 2011 /CNW/ - The active management environment in the third quarter of 2011 was one of the most challenging on record, highlights the most recent Russell Active Manager Report, which is produced quarterly and is based on recently released data from over 140 money manager products. Only 40 per cent of large cap Canadian equity investment managers beat the benchmark, down from 68 per cent in the second quarter - a dramatic decrease.

"Bottom-up stock fundamentals did not seem to matter in the quarter, as macro concerns such as the on-going debt crisis in Europe, dominated," said Kathleen Wylie, Senior Research Analyst at Russell Investments. "As well, we observed a significant spike in the correlations of stocks, and when that happens it is very challenging for active managers to add value. There were few places to hide, when 74 per cent of the stocks in the Index declined in the quarter. For many investment managers, benchmark-relative performance in the quarter was their worst on record."

Wylie, who has interviewed hundreds of investment managers during her career, went on to add that the fourth quarter is off to a positive start. "Many of the hardest hit stocks in the third quarter rebounded in October from the lows, and this is already translating into significantly stronger performance for many of those investment managers who struggled so much in the third quarter."

"Examples of stocks rebounding include Suncor Energy Inc, which was down 29 per cent and the top negative contributing stock in the third quarter, and is up 19 per cent in October. Almost 80 per cent of investment managers hold the stock so the performance has a notable impact on performance," said Wylie. Other widely held stocks that hurt manager performance in the third quarter but are now rebounding include Canadian Natural Resources, down 24 per cent but up 14 per cent in the fourth quarter; Manulife Financial, down 29 per cent in the third quarter but up 10 per cent so far in the fourth; and Teck Resources, which was down 37 per cent in the third quarter but up 29 per cent so far in this quarter.

Wylie also noted that gold stocks underperformed in October after strong performance in the third quarter. Large cap managers in Canada are underweight golds by almost 5 per cent on average.

Seventy-four per cent of dividend-focused investment managers beat the S&P/TSX Composite in the third quarter. This compares with 100 per cent of dividend managers beating the benchmark in the second quarter. "The only two sectors to post positive returns in the third quarter were Telecommunications and Utilities and dividend managers are overweight both those sectors," said Wylie. Overall dividend-focused managers were favourably positioned in seven out of 10 sectors.

"What I found particularly interesting is how well dividend managers performed in the third quarter despite the strength in gold stocks." In the quarter, six of the top 10 contributing stocks were golds. Dividend managers on average were almost 8 per cent underweight gold stocks at the start of the quarter, but those positions were offset to a certain extent by their significant overweights to BCE and Enbridge, which were also among the top contributing stocks."

Growth Managers Struggle Most in the Third Quarter

Growth managers were hit hardest in the third quarter with only 12 per cent able to beat the benchmark, down from 67 per cent in the second quarter and the lowest on record. Value managers were slightly better with 30 per cent beating the benchmark, down from 66 per cent in the second quarter.

"Growth managers were underweight the five sectors that outperformed and overweight the five that underperformed, so nothing went right for them in terms of sector positioning," said Wylie. "As well, their stock positioning was not favourable due to large negative contributors such as Royal Bank, Potash Corp, Teck Resources and Suncor Energy, which were all more widely held by growth managers and at overweight positions. On a positive note, top-contributing stocks such as Barrick and Goldcorp tended to be more widely held by growth than value managers and at larger weights."

So far in the fourth quarter, performance looks like it might be rewarding growth managers, who are more favourably positioned in eight out of 10 sectors compared to value managers. Energy is among the top performers and the largest contributor to the S&P/TSX Composite return. Growth managers have a slight overweight to Energy while value managers are underweight. As well, the stocks that have rebounded most in October tend to be more widely held by growth managers.

"With only three sectors outperforming so far in October, sector breadth is narrow, which often makes for a challenging active management environment. However, stock selection was the key driver in October based on the returns I've seen," said Wylie. "While it is early in the quarter, the tone has certainly improved compared to the third quarter, even though the last couple of days have been challenging. Although the volatility continues, the market is in positive territory and fundamentally strong companies that are trading at good valuations were rewarded in October."

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
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 $143.4 billion in assets under management as at September 30, 2011 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.

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Copyright © Russell Investments 2011. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.

SOURCE Russell Investments Canada Limited

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