75% of growth managers beat the S&P/TSX Composite Index in the third
quarter, compared to only 9% of value managers - a seven year low for
TORONTO, Oct. 25 /CNW/ - Investment managers have faced a challenging
environment of late. According to the Russell Active Manager Report, only 45%
of large cap Canadian equity investment managers beat the S&P/TSX Composite
Total Return Index in the third quarter of 2007. That was down from 53% in the
second quarter and 65% in the first quarter of this year. It was the lowest
number since the second quarter of 2006. The median large cap manager return
was 1.8%, which lagged the S&P/TSX Composite return of 2.0%.
"As the year has progressed, it's become tougher for Canadian equity
investment managers but the overall active management environment has improved
compared to 2005 and 2006, when resources were dominating," says Kathleen
Wylie, a senior research analyst at Russell Investments Canada. She notes that
the managers in the survey tend to be institutional rather than mutual fund
managers with a focus on non-taxable investors. Institutional managers
generally tend to hold less cash and have a smaller allocation to foreign
equities compared to mutual fund managers.
Underweight to Materials sector hurt most managers
There was less breadth in the market in the third quarter with only three
out of 10 sectors beating the benchmark (down from six out of 10 in the second
quarter) and given that active managers on average were underweight two of the
three top-performing sectors, that made it difficult for them to beat the
Large cap managers on average were slightly overweight the top-performing
Information Technology sector, which was up 14% and that helped their relative
performance. However, they tended to have a significant underweight in the
Materials sector, which was up 13%, the second strongest sector in the
quarter. What also hurt was that large cap managers had their largest
overweights to the Industrials and Consumer Discretionary sectors on average,
which both underperformed in the quarter.
Only 9% of value managers able to find added value
The biggest story in the quarter was the divergence between the
performance of growth and value managers. Only 9% of value managers beat the
S&P/TSX Composite return in the third quarter. In contrast, 75% of growth
managers outperformed the benchmark.
"I have not seen a number that low since the first quarter of 2000 when
we started officially tracking this data. It's even more interesting when you
compare that to the percentage of growth managers that beat the benchmark in
the quarter, which was the highest since the fourth quarter of 2005," says
"The median value manager return was only 0.5% compared to the median
growth manager return of 2.4%. It is normal to see some divergence between
growth and value managers, but not to that extent."
What made it tough for value managers was that, on average, they were
more than 1% underweight the top-performing Information Technology sector. In
contrast, growth managers were roughly 3% overweight. In addition, value
managers had notably larger underweights to the strong performing Materials
Research In Motion was up over 37% in the quarter and was the key stock
driving the Information Technology sector. Most value managers did not hold
that name at all in their portfolios. Within Materials, most value managers
were underweight gold stocks at a time when the S&P/TSX Gold Index was up 14%
in the quarter.
Potash, which was up 27% in the quarter, was another name within
Materials that hurt value managers. Potash is a stock that is not typically
owned by value managers, while a number of growth managers held the stock at
"There was a much wider range in returns between the top-performing
growth manager and the bottom-performing growth manager compared to value
managers," says Wylie. "There was difference of 15% for growth managers
compared to only 4% for value managers. This shows that the environment for
value managers was difficult across the board."
Large Cap managers beat Small Cap Managers for the first time in a year
Small cap managers took a beating in the quarter with the median small
cap return of -1.3% compared to the median large cap manager return of 1.8%.
This was the first time in a year that large cap managers beat small cap
"If you look at the S&P/TSX Small Cap Index, 8 out of 10 sectors posted
negative returns in the quarter. That really hurt small cap managers and also
any large cap managers who dipped down into the small cap space," says Wylie.
Small cap managers tend to have about 5% more of their portfolios in
Industrial and Consumer Discretionary stocks compared to large cap managers.
Both those sectors underperformed in the large and small cap space, which hurt
their relative performance.
While small cap managers lagged large cap managers, they did find it
easier to beat S&P/TSX Small Cap Index, given the benchmark's return of -5.2%
in the quarter. "Small cap managers generally looked great relative to their
benchmarks but not when compared to large cap managers on an absolute basis"
"It was not their sector positioning that helped small cap managers
relative to the benchmark in the quarter; it was their stock selection. They
were able to avoid many of the worst-performing stocks. Note that small cap
stocks have struggled for the last two quarters relative to large cap stocks.
Overall, it was definitely a very interesting quarter for active managers."
The investment manager returns in this report are total returns including
reinvested dividends and cash and are gross of management fees and expenses.
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For further information: Thien Huynh, Russell Investments Canada, (416)