2012 was best active management environment in a decade - according to Russell Investments Canada

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 note."

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 managers."

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 10 years.

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 investing."

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. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.

Russell has more than $162 billion in assets under management (as of 12/31/2012) and works with 2,400 institutional clients and more than 580 independent distribution partners globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 12/31/11). 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 $1.5 trillion in 2011 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, which includes more than 80 countries and more than 10,000 securities. Approximately $3.9 trillion in assets are benchmarked to the Russell Indexes.

Russell is headquartered in Seattle, Washington, USA, and has offices around the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London, Melbourne, Milan, New York, Paris, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow @Russell_News

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.

Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.

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.

Copyright © Russell Investments 2013. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.

SOURCE: Russell Investments Canada Limited

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