Russell Canadian Active Manager Report Highlights
Median large cap manager more than 2% ahead of the S&P/TSX Composite
Index in 2012
Value style leads in the fourth quarter and for the year as a whole
Environment mixed so far in 2013
TORONTO, Feb. 5, 2013 /CNW/ - Although it was not an easy ride in 2012,
large cap managers posted their strongest benchmark-relative
performance in a decade, according to the latest Russell Investments
Canadian Active Manager Report. The median return was 9.4%, more than
2% ahead of the S&P/TSX Composite Index's return of 7.2%. Using annual
returns, 76% of large cap managers beat the benchmark in 2012 compared
to 50% in 2011 and 41% in 2010.
"I'm sure it was a surprise how well managers did overall in 2012, but
when you step back and look at each of the individual quarters, it was
really only the third quarter where managers struggled to beat the
benchmark," highlights Kathleen Wylie, Head, Canadian Equity Research
at Russell Investments.
The Russell Canadian Active Manager Report is produced quarterly and is
based on recently released data from more than 140 Canadian
institutional equity manager products.
The year started on a positive note when 66% of large cap managers beat
the benchmark in the first quarter of 2012, and then improved in the
second quarter when 69% beat the benchmark although the Index declined
so investment managers lost money.
"No one likes to lose money so the best situation for investment
managers is when the S&P/TSX Composite Index increases and investment
managers outperform," explains Wylie. "The first and fourth quarters
were examples of that win-win situation. In the fourth quarter, the
index rose 1.7% and 81% of large cap managers beat that benchmark, so
that was the best of both worlds and ended the year on a positive
The key factor that impacts relative performance among investment
managers tends to be how the Energy and Materials sectors perform.
"Those two sectors accounted for 46% of the S&P/TSX Composite Index's
weight at the start of the fourth quarter, and large cap managers on
average have their largest underweights to Energy and Materials. The
performance of those sectors typically has a significant impact on
whether managers outperform or underperform the benchmark," says Wylie.
The Energy and Materials sectors underperformed the Index in the first,
second and fourth quarters and for the year overall, so that helped
managers beat the benchmark during those periods.
Value and dividend-focused managers tend to have the largest
underweights to Energy and Materials so they benefited most from the
underperformance of those two sectors. For the year, the median value
manager return was 3.9% ahead of the benchmark, and the median
dividend-focused return was 2.2% ahead. Growth managers lagged the
Index for the second consecutive year. "On average, growth managers
were overweight Energy and only slightly underweight Materials so that
hurt their performance relative to value and dividend-focused
Within Materials, gold stocks were also a factor, declining roughly 15%
in 2012. Large cap managers on average were 5% underweight gold stocks
throughout the year, with dividend-focused managers more than 8%
underweight, value roughly 7% underweight and growth managers only
about 2% underweight.
"What's really important to take away from this is that active
management can add value," stresses Wylie, "although there are periods
when the environment is more challenging. If you look back to the start
of the financial crisis in 2008, there have been a number of quarters
where macroeconomic shocks dominated the headlines and company
fundamentals were largely ignored. That made it difficult even for
skilled investment managers. But in periods where there is a focus on
company fundamentals, good sector breadth, less volatility in the
market and low correlations among stocks, skilled active managers who
stick to their discipline and focus on companies with strong
fundamentals trading at reasonable valuations, are expected to beat the
benchmark." The median manager return over the last 10 years was in
line with the benchmark return, but the top quartile manager was
roughly 135 basis points ahead on average per quarter. On average, more
than 51% of large cap managers have beaten the benchmark over the last
Year Ends on a Positive Note
As noted, 81% of large cap managers beat the S&P/TSX Composite Index's
return in the fourth quarter—the highest since the second quarter of
2004. The median manager return was 3.2%, well ahead of the Index
return of 1.7%.
"Good sector breadth, with seven out of 10 sectors outperforming,
combined with the underperformance of Energy and Materials, including
gold, helped active managers close the year on a high," says Wylie.
"All styles outperformed in the quarter, including growth, but value
managers came out on top." In the fourth quarter, 97% of value managers
outperformed compared to 89% of dividend-focused and 63% of growth
managers. Value managers benefited from their overweight to the three
top-performing sectors: Consumer Staples, Information Technology and
Industrials. The median value manager return was 4.1% compared to 3.3%
for dividend-focused and 1.9% for growth managers.
Royal Bank and Bank of Nova Scotia were the top two contributing stocks
in the fourth quarter and are widely held by large cap managers. Royal
Bank rose 7% and is held by 76% of large cap managers while Bank of
Nova Scotia increased 8% and is held by 87% of large cap managers. Both
stocks are popular with value and dividend-focused managers.
Research in Motion (now BlackBerry), rose 57% in the quarter, which
benefited some investment managers. The stock is not as widely held as
it once was with only 19% of large cap managers holding it at the start
of the fourth quarter compared to 44% a year earlier. Value managers
found the stock most attractive but it was still only held by 33% of
that group. Only 6% of growth and 13% of dividend-focused managers
owned the stock.
Value and Dividend-Focused Managers Still in Favour so far in 2013
During the first month of the year, the S&P/TSX Composite Index is up
more than 2% and sector breadth is positive with eight out of 10
sectors beating the benchmark. However, with the Materials sector,
including gold, underperforming but Energy and Financials
outperforming, the environment is mixed for investment managers who are
underweight all three sectors.
In terms of style, dividend-focused managers have significantly larger
underweights to Materials, so the environment may be tilted back in
favour of their style again, but value managers are also being
rewarded. Once again, it appears that growth managers are lagging.
"The growth style of investing has not been rewarded for most of the
period since the start of the financial crisis in 2008," highlights
Wylie, "but that will change eventually. No one style is in or out of
favour all the time. It's difficult to predict when that will change,
so a multi-manager, multi-style, multi-asset approach is best when
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