Russell Active Manager Report Highlights
- Narrow market makes it difficult for large cap active managers as
only 36% beat the index
- Value managers lag growth in first quarter after comeback in 2008
- More bullish sentiment appears to be extending into the second
TORONTO, April 29 /CNW/ - For the first time since the second quarter of
2007, Canadian small cap managers outperformed large cap managers - according
to results from the latest Russell Active Manager Report.
The median small cap manager returned -1.0% compared to -2.7% for the
median large cap manager in the first quarter of 2009.
"That was the strongest outperformance of small cap managers relative to
large cap in two years," says Kathleen Wylie, senior research analyst at
Russell Investments Canada Limited.
"Small cap managers tend to have larger weights in the Materials and
Information Technology sectors compared to large cap managers and that helped
their relative performance in the first quarter since those two sectors
outperformed. In addition, small cap managers tend to have a significantly
smaller portion of their portfolio in Financials compared to large cap
managers and that, too, would have helped in the first quarter since
Only 36% of large cap Canadian equity active managers beat the S&P/TSX
Composite Index in the first quarter of 2009, which was down from 72% in the
fourth quarter and 65% in the third. However, it was a better start to the
year than in 2008 when less than 20% of active managers beat the benchmark.
"It was a tough quarter overall in terms of beating the benchmark. Within
the quarter, it's worth noting that 68% of managers outperformed in February
when the S&P/TSX was down 6.3%. With 7 out of 10 sectors beating the benchmark
during that month, managers found it a more favourable environment to beat the
benchmark," says Wylie.
"Although the first quarter was challenging 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 30
basis points per quarter over the last 10 years."
The challenge for active managers overall in the first quarter was that
the market was more narrow in terms of sector performance with only 4 out of
10 sectors beating the benchmark. In the first quarter, Information Technology
was the top-performing sector followed closely by Materials. Active managers
on average are overweight Technology but significantly underweight Materials.
Also, the Energy sector outperformed the Index in the first quarter and
managers tend to be underweight that sector as well.
"The Energy and Materials sectors account for roughly 45% of the S&P/TSX
weight so positioning in those sectors is key," explains Wylie.
"Active managers tend to have their largest overweights in Consumer
Discretionary, Industrials and Consumer Staples and these three sectors all
underperformed in the first quarter which hurt their benchmark relative
Within Materials, gold stocks were strong in the quarter, up roughly 4%.
Interestingly though, Barrick Gold Corp did not participate in the strength
with the stock down 8.7% making it the second largest detractor in the Index.
"Barrick Gold Corp. is the most popular gold stock among large cap active
managers with roughly 60% of managers holding it at an overweight on average
so the underperformance of the stock hurt active managers overall in the first
quarter", says Wylie.
Growth managers beat value in first quarter
After making a comeback in the second half of 2008, value managers lagged
growth managers in the first quarter of 2009. The median value manager return
was -3.4% compared to -2.0% for growth managers. Only 37% of value managers
beat the S&P/TSX Composite return in the first quarter of 2009, which is down
from 67% in the fourth quarter in 2008. That compares to 47% of growth
managers in the first quarter of 2009 versus 60% in the fourth quarter of
"The switch from value back to growth highlights how quickly styles can
come in and out of favour, and that the best approach to weather these swings
is multi-style diversification. 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 and even less of a difference over 20
years," says Wylie.
Overall, growth managers were more favourably positioned in 7 out of 10
sectors compared to value managers. For example, growth managers were helped
by having significantly larger overweights to the Information Technology
sector, specifically Research in Motion, which was up 10% in the first quarter
and among the top 10 contributors to the S&P/TSX Composite Index return.
Almost 75% of growth managers held RIM at the start of the quarter at
overweight positions on average compared to roughly 25% of value managers who
held it at underweight positions on average.
"As well, value managers tend to be more underweight gold stocks compared
to growth managers so that would have hurt performance," says Wylie.
Growth managers also benefited from being significantly underweight
Financials in the first quarter of 2009 compared to value managers, who were
overweight. The Financial sector fell roughly 6% during the first quarter.
"It's been interesting to watch how active managers have been
repositioning their portfolios in this environment. Value managers have been
actively reducing their overweight in Financials during the latter half of
2008 while growth managers have been reducing their underweights. Value
managers remain overweight while growth managers remain underweight but the
gap has certainly narrowed," says Wylie.
"What's really interesting is how much the market changed from the first
two months in the year compared to March and the more recent environment. The
year started off with the S&P/TSX Composite down 9.1% in the first two months
of the year then up 7.8% in March. The more bullish sentiment appears to be
extending into the second quarter," says Wylie.
While the strength in the market is certainly a positive, it appears to
be a more challenging environment for Canadian large cap active managers since
there is less sector breadth. In March, Financials, Energy and Information
Technology were ahead of the benchmark return and those three sectors plus
Industrials are dominating so far in April.
"Active managers on average are underweight Financials and Energy but
overweight Information Technology and Industrials. Their largest overweights
are still in Consumer Discretionary and Consumer Staples companies which are
currently underperforming. Right now, positioning in only 4 out of 10 sectors
are benefiting large cap managers so they may be struggling relative to the
benchmark but it's still early yet, "says Wylie.
"As we all know, the situation changes daily but we are confident that in
the long run investment managers with skill in finding good companies with
solid fundamentals that are trading at reasonable valuations will be rewarded.
As such, it's even more critical than ever to use in-depth due diligence to
identify those managers."
For previous Russell Active Manager Reports, please contact Thien Huynh:
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