Tough economic times highlight the benefits of active management
Russell Active Manager Report Highlights
- Highest active manager outperformance in 4 1/2 years
- Gold stocks up 15.5% in fourth quarter
- 67% of value managers beat the benchmark compared to 60% of growth
TORONTO, Feb. 4 /CNW/ - According to results from the latest Russell
Active Manager Report, 72% of large cap Canadian Equity active managers beat
the S&P/TSX Composite Index in the fourth quarter of 2008, up from 65% in the
third quarter and the highest percentage since the second quarter of 2004.
"How managers performed during the fourth quarter really depended on
their cash levels and their gold weighting. Being underweight Energy and
Financials (the two largest sectors) would have been positive since those two
sectors underperformed the Index. The top-performing sector was Consumer
Staples but at a weight of less than 3% in the Index, the impact of this
sector was not as significant," says Kathleen Wylie, Senior Research Analyst
at Russell Investments Canada Limited.
"Although some market environments are more difficult than others for
active managers, our data confirms that over the long run, active management
does add value with large cap Canadian equity investment managers beating the
benchmark by roughly 140 basis points per year over the last 10 years."
Almost all that glitters is gold
"The fourth quarter still had challenges as gold stocks became a
significant factor. Although the average active manager was underweight gold
stocks overall, the majority of large cap managers in Canada held Barrick Gold
Corp. and Goldcorp Inc. at overweight positions on average - which really
helped their benchmark relative performance," says Wylie.
Barrick Gold and Goldcorp were the top two contributing stocks in the
S&P/TSX Composite in the fourth quarter and for the year overall. Gold stocks
rose 15.5% in the fourth quarter alone, which was almost 40% ahead of the
S&P/TSX Composite return of -22.7%. By the end of the year, gold stocks
accounted for 11% of the weight in the S&P/TSX Composite making them a larger
weight than all but two sectors in the Index.
On the surface, 2008 appeared to be a significantly better year for
active management in Canada with 68% beating the S&P/TSX Composite, up from
47% in 2007 and the highest since 2004. However, the improvement in
performance was attributable to the last two quarters of 2008. In the first
half of the year, active managers struggled relative to the benchmark in the
narrow environment that was dominated by the performance of the Energy and
Materials sectors; only 20% and 41% of investment managers beat the benchmark
in the first and second quarters of 2008, respectively.
The median large cap manager return was -20.8% in the fourth quarter,
which was ahead of the S&P/TSX Composite return of -22.7%. For the entire year
2008, the median manager return was roughly 120 basis points ahead of the
benchmark return, which was an improvement from 2007 when the median manager
lagged the benchmark by roughly 25 basis points.
Cash aided performance
The other factor which helped some active managers in the latter half of
the year was holding cash in portfolios. Although the Russell Active Manager
Report covers institutional managers who tend to hold less cash than mutual
fund managers, on average the managers in the report started the third quarter
with almost 4% of their portfolios in cash. Cash levels increased throughout
the fourth quarter, moving above 5%.
"While 4%-5% may not sound like a significant amount of cash - when you
have a market that was down 18.2% in the third quarter and down 22.7% in the
fourth quarter, any amount of cash significantly benefited their
benchmark-relative performance," says Wylie.
Value managers beat growth in fourth quarter and 2008
After lagging growth managers and the benchmark for three years, value
managers made a comeback in 2008. In the fourth quarter, 67% of value managers
beat the benchmark compared to 60% of growth managers. That compares to 93% of
value managers and 27% of growth managers in the third quarter. Looking at the
year as a whole, value managers beat growth managers in three out of four
quarters and were able post a median return that was ahead of the benchmark by
roughly 3%. The median value manager return was -29.8% for the year 2008
versus the median growth manager return of -34.2% and the S&P/TSX Composite
return of -33.0%.
"The difference in the fourth quarter was not that dramatic but value
managers certainly benefited from having a larger overweight on average to
top-performing Barrick Gold compared to growth managers. Overall, value
managers tend to be more underweight golds than growth managers but Barrick
has been a popular name among value managers for quite some time," says Wylie.
"I know that after three years of underpeformance, some may have been
questioning the value style of investing in Canada but the improvement in 2008
for value managers highlights that styles come in and out of favour and that
predicting when that will happen is impossible. Our data shows that on average
the median value manager was ahead of the median growth manager by only 10
basis points per quarter during the last 10 years. Over 20 years, the
difference is even more insignificant."
At the stock level, growth managers would have been hurt by owning
Research in Motion and Potash Corp. with the majority of growth managers
overweight both on average. RIM fell 31% in the fourth quarter and Potash fell
35%, making both among the top 10 negative contributing stocks. As well, the
worst-contributing stock was Manulife Financial which was down 45% in the
fourth quarter and was held at a slightly larger overweight on average by
growth managers than by value managers.
Managers continued to actively reposition their portfolios during the
fourth quarter with growth managers on average moving into some Financial
stocks thereby reducing their underweight to the sector while value managers
were reducing their overweights to Financials overall. Value managers remain
overweight Financials while growth managers are underweight but their
positioning moved closer together which would have hurt the growth style
slightly relative to the value style in the quarter.
"It appears that growth managers may be benefiting since Information
Technology was the top-performing sector in January, with RIM significantly
higher after struggling in the fourth quarter. The majority of growth managers
still own RIM and tend to hold it at an overweight so that should help their
There appears to be some life in small cap stocks with the S&P/TSX Small
Cap Index up 0.1% in January compared to the Composite drop of 3.0%. Small cap
stocks have lagged large cap for seven consecutive quarters. If small cap
stocks continue to outperform, we might also see managers that have small or
mid-cap biases improve their relative performance, which would be a nice
change. However, it's too early to tell and the market can change quite
quickly," says Wylie.
"Large cap managers on average have their largest oveweights to
Industrials, Consumer Discretionary and Consumer Staples stocks and their
largest underweights to Energy and Materials. Going forward in 2009, if we get
a market that rewards good companies with solid fundamentals that are trading
at reasonable valuations, then active managers with skill in finding these
companies and constructing portfolios, will benefit over time."
For previous Russell Active Manager Reports, please contact Thien Huynh:
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