81% of growth managers beat the benchmark, according to latest Russell
Active Manager Report
Russell Active Manager Report Highlights
- Active managers are improving performance but are still struggling
relative to historical levels.
- The second quarter marked the best performance for growth managers
since the fourth quarter of 2005 and was one of the worst quarters on
record for value managers.
- Value managers experience some promise early in the third quarter.
TORONTO, July 30 /CNW/ - According to new data released by Russell
Investments, the investing environment was better for active managers overall
in the second quarter of 2008 with 41% beating the benchmark - up from a
record low of less than 20% in the first quarter.
"The environment was more favourable but still presented challenges for
active managers because of its narrowness, with only the Energy and Materials
sectors beating the benchmark. Active managers, on average, are underweight
those sectors which together account for almost half the index so this made it
difficult to beat the benchmark," says Kathleen Wylie, a senior research
analyst at Russell Investments Canada.
"And if you look at what drove the market in the second quarter, it was
the Energy sector, which accounted for 6.1% of the 9.1% return of the S&P/TSX
Composite Index. The Energy sector was up 23% in the second quarter following
a 1% return in the first quarter. As a result the median large cap manager
return came in at 8.2% which lagged the S&P/TSX Composite return of 9.1%."
Most active managers benefited from underperforming gold stocks. The
S&P/TSX gold sub-sector fell 2.5% after increasing 16.5% in the first quarter.
Most active managers are underweight gold stocks. This strategy improved
benchmark relative performance in the second quarter.
Growth managers fare significantly better than value
81% of growth managers beat the benchmark compared to just 12% of value
managers. That compares to just 25% of growth managers and 27% of value
managers beating the benchmark in the first quarter of 2008. The median large
cap growth manager return was 10.4% compared to the median value manager
return of 4.7%.
"That degree of underperformance by value managers was the largest I've
seen since the first quarter of 2000 during the technology bubble. Value
managers had significantly larger underweights to the top-performing Energy
and Materials sectors compared to growth managers at the start of the quarter,
which hurt their relative performance," says Wylie.
"It's been very interesting to see how growth managers have been actively
moving into the Energy sector as the current and forward-looking fundamentals
became more positive for energy companies and the result was that they were
significantly less underweight energy companies than they were even a couple
of quarters ago and compared to value managers. As result, growth managers on
average had a weight similar to the Index weight in Energy while value
managers were 3% underweight the sector on average."
At the stock level, growth managers were more favourably positioned in
the top-contributing stocks in the second quarter. For example, most growth
managers held Potash Corp in the quarter and were on average notably
overweight the stock compared to the index. Potash rose 48% in the second
quarter and was the top-contributing stock to the index return. On the other
hand, most value managers did not own Potash so that hurt their benchmark
relative return. The other top-contributing stocks that benefited growth
managers generally were Canadian Natural Resources (up 44%), Encana (up 19%),
Suncor (up 19%), Agrium (up 72%).
Looking ahead to the third quarter
In the third quarter, the environment has already started to improve for
value managers as investors saw some life in the Financials sector and a
pull-back in resource stocks. Since value managers on average are roughly 3%
overweight Financials, 3% underweight Energy, and 5% underweight Materials,
value managers have seen a notable improvement in their benchmark relative
"However, we're not even one month into the third quarter and as we all
know, things change quickly. Already this week, the market has given back some
of that gain in Financials and we're seeing a slight bounce back in
resources," explains Wylie.
"It's impossible to predict which investment style will outperform even
over shorter time periods which is why a multi-style approach to portfolio
construction makes sense."
Active management historically effective over the long run
Wylie points out that although the environment for active managers has
been challenging during the last year, over the long run, active managers have
historically added value, even after fees, and that the managers in this
survey are institutional rather than mutual funds with a focus on non-taxable
Institutional investment managers generally tend to hold less cash and
hold a smaller allocation to foreign equities compared to mutual fund
managers. In the last 10 years, the median large cap manager has beaten the
S&P/TSX Composite on average by 25 basis points per quarter.
About the Russell Active Manager Report
Kathleen Wylie, Senior Research Analyst for Russell Investments Canada,
is one of over 100 analysts at Russell globally who monitors the performance
of active managers. The Canadian Russell Active Manager Report is based on
recently released data from over 115 Canadian money managers and is released
every quarter. For past active manager data, please contact Thien Huynh at
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.
Russell Investments logo is a trademark of Frank Russell Company.
Date of First Publication: July 30, 2008
For further information:
For further information: Thien Huynh, (416) 640-2529; Katita Stark,