Challenging start to 2014 for active equity managers in Canada; results from new Russell Canadian Active Manager Report

First Quarter 2014 Russell Canadian Active Manager Report Highlights

  • Only 31% of large cap managers beat the benchmark
  • Small cap managers lead large cap for the 5th consecutive quarter
  • Environment improving slightly thus far in the second quarter

TORONTO, May 1, 2014 /CNW/ - After a strong year for active managers in 2013, less than a third (31%) of large cap managers were able to beat the S&P/TSX Composite Index in the first quarter of 2014, down from 86% in the previous quarter. The median manager return in the quarter was 5.5%, behind the S&P/TSX Composite Index return of 6.1%.

"We saw the trend reverse this quarter after seeing a string of five consecutive quarters of favourable active management environments and a 2013 that was overall the best year for active managers since 2001," noted Kathleen Wylie, Head, Canadian Equity Research at Russell Investments. "There will always be periods in which active managers struggle, but in the long run they can add value. Over the last 10 years, in fact, an average of 55% of large cap managers have beaten the benchmark with the top quartile manager ahead of the benchmark by nearly 150 basis points per quarter on average."

During the first quarter, five of 10 sectors beat the benchmark, but investment managers were only favourably positioned in four. The top three performing sectors in Canada were Healthcare, Materials and Energy and Canadian large cap managers were underweight all three at the start of the quarter. The strength in Healthcare was driven by Valeant Pharmaceuticals, up nearly 17% but only held by 37% of large cap managers.  The largest negative contributing stock in the quarter was Teck Resources, down nearly 14% and held by 58% of large cap managers. Large cap managers had their largest overweight to Consumer Discretionary, Information Technology, and Industrials, three underperforming sectors.

Within Materials, gold stocks rose 12% in the quarter. "The weight of gold stocks in the Index was only 5% at the start of the first quarter, but active managers were still 2% underweight so that hurt their benchmark relative performance to some extent," explains Wylie. "The good news is that gold stock performance is having less of an impact on benchmark relative performance now than in the past when gold peaked at 14% of the Index and large cap managers were 6% underweight on average."

All Styles Lagged in the Quarter

Value managers fared slightly better than growth and dividend managers in the first quarter, with 33% beating the benchmark. That compares to only 25% of growth and 15% of dividend managers beating the benchmark. The median value manager return was 5.5%, just slightly ahead of the median growth manager return of 5.4%. The median dividend manager return was 4.3%. Dividend managers struggled the most due in part to their overweight to Telecom stocks, which underperformed. They also have the biggest underweight to gold stocks at nearly 4% compared to 1.5% for growth and 2% for value managers. And they have a larger weight in Financials compared to the other styles.

"It is interesting to note that dividend managers on average have moved to an underweight position in Financials. Part of that stems from the fact that the Financials sector has now grown to over 35% of the Index," says Wylie. "The Canadian market has a tendency to go from one concentration issue to another, which can present challenges for investment managers. Nortel was the concentration issue in 2000, then resources grew to over 50% of the Index weight in 2008, then gold stocks peaked at 14% in 2011. And now Financials is the new concentration issue."

Small Cap Managers Ahead of Large Cap

For the fifth consecutive quarter, small cap managers in Canada have beaten their large cap counterparts. In the first quarter, the median small cap return was 7.9% compared to the median large cap return of 5.5%. Small cap manager performance matched the S&P/TSX Small Cap Index return of 7.9%, ahead of the S&P/TSX Composite return of 6.1%. In the first quarter, 46% of small cap managers beat their benchmark, down from 92% in the fourth quarter.

Sector breadth in the small cap space was narrower, with only four sectors beating the benchmark and small cap managers on average underweight the outperforming sectors, which were Energy, Materials, Healthcare and Utilities. "Small cap managers who were overweight Energy and underweight Financials did best in the quarter but it looks like stock selection rather than sector positioning was key for most managers that outperformed," states Wylie.

Although small cap manager returns can be volatile, they have added significant value against the benchmark and relative to large cap managers. Over the last 10 years, the median small cap manager was ahead of the benchmark by roughly 160 basis points on average per quarter and beat the median large cap manager by nearly 65 basis points on average per quarter.

Environment Looking Better So Far in the Second Quarter

Although it is still early, the environment for active managers appears to be more favourable so far in the second quarter. Sector breadth is worse, with only three of 10 sectors ahead of the benchmark, but large cap managers are favourably positioned in six of them. Although Energy is the top-performing sector and large cap managers on average are underweight, they are benefitting from their overweight to Information Technology and Industrials which are both outperforming. Large cap managers have their largest underweights to the Materials and Financials sectors, which is helping their benchmark relative performance since both sectors are underperforming.

"It's not clear which style is ahead so far this quarter," highlights Wylie. Growth managers are likely benefiting from their larger overweight to Information Technology and their underweight to Telecom while value managers are likely being helped by a larger overweight on average to Industrials and a large underweight to Financials. Dividend managers would benefit most from the decline in gold stocks so far this quarter since they have the largest underweight. "It's too early to tell because the environment is changing every day," states Wylie, "so it's best to just stay the course and maintain a diversified portfolio."

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

Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell stands with institutional investors, financial advisors and individuals working with their advisors—using the firm's core capabilities that extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes to help each achieve their desired investment outcomes.

Russell has more than CAD$286.7 billion in assets under management (as of 3/31/2014) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has US$2.4 trillion in assets under advisement (as of 6/30/2013). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than US$1.6 trillion in 2013 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, including more than 80 countries and more than 10,000 securities. Approximately US$5.2 trillion in assets are benchmarked (as of 12/31/2013) to the Russell Indexes, which have provided investors with 30 years of smarter beta.

With Canadian headquarters in Toronto, Russell operates globally, including through its headquarters in Seattle, Washington and offices in New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Beijing, Toronto, Chicago, San Diego, Milwaukee, Montreal, Edinburgh and Vancouver.

Important Information

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.

Unless otherwise stated all index data is sourced from ©BNY Mellon Asset Servicing.  All rights reserved.

Russell Investments and the Russell Investments logo are registered trademarks of Frank Russell Company, used under license by Russell Investments Canada Limited.

Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as Russell Investments.

Copyright © Russell Investments Canada Limited 2014. All rights reserved.

SOURCE: Russell Investments Canada Limited

For further information: Catherine Winchell, 416.640.6899; Beja Rodeck Communications, 905.885.5945; Russell Investments, Canada Limited, 1 First Canadian, 100 King Street West, Suite 5900, Toronto, ON M5X 1E4, www.russell.com/ca; For real-time news updates, follow @Russell_News on Twitter.

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