Russell Active Manager Report Highlights
- Value managers make a huge comeback in the quarter as 93% beat the
benchmark - the most in almost 5 years
- The median growth manager return lags median value manager by 8% in
the quarter - the largest difference since the tech bubble burst
(over 7 years)
- Manager returns exhibit extremes with the difference between the best
and worst performing manager at 36% - a difference not seen in almost
TORONTO, Oct. 29 /CNW/ - The extreme market environment in the third
quarter of 2008 highlighted the need for active management with 65% of large
cap Canadian equity active managers beating the benchmark. This was up from
41% in the second quarter, up from 20% in the first quarter, and the highest
since the first quarter of 2007 - according to the Russell Investments Active
Manager Report. In comparison, Russell found that, on average, 54% of active
managers have historically beaten the benchmark over the 9-year period in
which data has been collected.
The S&P/TSX Composite Index was down -18.2% in the volatile third
quarter, but the median large cap manager returned -17.2%. It was a quarter of
reversals with the Energy and Materials sectors among the worst performers,
after being the best performers a quarter ago, and Financials was the only
sector to show a positive return. The Financials sector had lagged the overall
composite return for five consecutive quarters prior to this quarter.
"Active managers on average were underweight Energy and Materials and
slightly overweight Financials, helping them beat the benchmark after lagging
for four consecutive quarters. Managers benefited from more breadth in terms
of sector performance with 7 out of 10 sectors beating the benchmark. Most
investment managers struggle during extreme narrow markets which are dominated
by 1 or 2 sectors, so that made it challenging for active managers in the last
year but there was a notable improvement during the third quarter," says
Kathleen Wylie, Senior Research Analyst at Russell Investments Canada Limited.
"If you look at the actual sector returns, however, the difference in
returns between the top-performing Financial sector and the bottom-performing
Information Technology sector was over 40%, which was the widest in almost six
years. That led to a much wider difference between the top- and
bottom-performing investment manager return in Canada of an astonishing 36%,
the widest in almost nine years when we were in the middle of the technology
bubble. This number alone highlights what an extreme environment this has
Value managers make a huge comeback
After struggling for most of the last three years, an astounding 93% of
value managers in Canada beat the benchmark in the third quarter compared to
just 27% of growth managers. That compares to just 12% of value managers and
81% of growth managers in the second quarter. The median large cap value
manager return was -12.9% compared to the median growth manager return of
"I have not seen that much of a difference in returns between value and
growth managers since the first quarter of 2001 when value managers beat
growth by almost 11% as they benefited from not owning Nortel when that stock
was plunging," says Wylie.
"This dramatic improvement in value manager performance relative to
growth highlights how quickly styles can come in and out of favour and that
no-one can predict when that will happen. That's why a multi-manager,
multi-style approach to portfolio management makes the most sense as a
She notes that over the last 10 years, the median growth manager return
was ahead of the median value manager by just 9 basis points, which highlights
that over the long run, there is not much difference in returns from styles
but on a quarter-to-quarter basis, extreme differences can occur.
Sector positioning was a key factor in the value managers' outperformance
in the third quarter. On average, value managers were roughly 5% overweight
the Financial sector compared to growth managers who were 6% underweight. Also
helping value managers were their underweights to the three worst performing
sectors, Information Technology, Materials and Energy, whereas growth managers
were, on average, overweight those sectors. In terms of overall sector
positioning, value managers were more favourably positioned in 9 of 10 sectors
compared to growth managers, resulting in a significant factor in value
At the stock level, value managers were helped more by what they did not
own than what they owned.
"The largest negative contributor to the S&P/TSX Index return in the
quarter was Potash and very few value managers held the stock while the
majority of growth managers held it and had overweight positions. Potash fell
42% in the third quarter after gaining 185% in the one year period prior to
the third quarter," says Wylie.
"The same can be said for Research in Motion, with only a couple of value
managers holding the stock but the majority of growth managers holding it at
an overweight on average. RIM fell 41% in the third quarter after rising 67%
in the one-year period ahead of the quarter."
In the Energy sector, Growth managers were hurt by the majority owning
Suncor, Canadian Natural Resources and Encana. Those stocks were among the
worst contributors to the Index return. In terms of how managers were
positioning their portfolios ahead of the third quarter, Wylie noted that
value managers had been shifting out of Energy and into Financials whereas
growth managers were moving in the opposite direction. The re-positioning
worked well for value managers but hurt growth managers.
Although bank stocks in Canada tend to be widely held by all investment
managers, more value managers tend to hold them and at larger weights compared
to growth managers, which benefited their performance since Financial stocks
were surprisingly strong performers in the quarter. Only 17% of stocks in the
S&P/TSX Composite Index had positive returns in the quarter and 4 out of the 5
big bank stocks were among those positive performers (only Toronto Dominion
had a negative return).
Looking ahead to the fourth quarter
"As the volatility extended into the fourth quarter, it is impossible to
predict which style will outperform. Everything is changing so quickly. It
still looks like there is breadth in terms of sector returns, with only Energy
and Materials lagging the benchmark return and Financials somewhere in the
middle. Value managers tend to have their largest overweights to Financials,
Consumer Discretionary and Consumer Staples stocks whereas growth managers
have their largest overweights to Industrials and Information Technology,"
"But even the sector positioning is changing quickly as investment
managers take advantage of where they see the best opportunities. What is
clear is that there are many opportunities out there and that at some point in
time, fundamentals will matter again. As a result, investment managers who
have skill at researching companies and building portfolios will do well in
the long run."
Russell Investments provides strategic advice, world-class
implementation, state-of-the-art performance benchmarks and a range of
institutional-quality investment products. With nearly US$213 billion in
assets under management (as of 3/31/08), Russell serves individual,
institutional and advisor clients in more than 40 countries. Russell provides
access to some of the world's best money managers. It helps investors put this
access to work in corporate defined benefit and defined contribution plans,
and in the life savings of individual investors.
Founded in 1936, Russell Investments is a subsidiary of Northwestern
Mutual Life Insurance Company and headquartered in Tacoma, Wash. Russell has
principal offices in Amsterdam, Auckland, Johannesburg, London, Melbourne, New
York, Paris, San Francisco, Singapore, Sydney, Tokyo and Toronto.
Russell Investments Canada Limited is a wholly-owned subsidiary of Frank
Russell Company. For more information, please go to www.russell.com/ca.
Commissions, trailing commissions, management fees and expenses all may
be associated with mutual fund investments. Please read the prospectus before
investing. Mutual funds are not guaranteed, their values change frequently and
past performance may not be repeated.
Nothing in this publication is intended to constitute legal, tax
securities or investment advice, nor an opinion regarding the appropriateness
of any investment, nor a solicitation of any type. This is a publication of
Russell Investments Canada Limited and has been prepared solely for
information purposes. It is made available on an "as is" basis. Russell
Investments Canada Limited does not make any warranty or representation
regarding the information.
Date of First Publication: October 29, 2008. Russell Investments logo is
a trademark of Frank Russell Company.
For further information:
For further information: Thien Huynh, (416) 640-2529; Katita Stark,