Russell Active Manager Report Highlights
Canadian large cap investment managers struggle to beat S&P/TSX
Composite Index in the third quarter but see better environment in the
Only 12 per cent of growth managers and 30 per cent of value managers outperformed in third quarter
TORONTO, Nov. 2, 2011 /CNW/ - The active management environment in the
third quarter of 2011 was one of the most challenging on record,
highlights the most recent Russell Active Manager Report, which is
produced quarterly and is based on recently released data from over 140
money manager products. Only 40 per cent of large cap Canadian equity
investment managers beat the benchmark, down from 68 per cent in the
second quarter - a dramatic decrease.
"Bottom-up stock fundamentals did not seem to matter in the quarter, as
macro concerns such as the on-going debt crisis in Europe, dominated,"
said Kathleen Wylie, Senior Research Analyst at Russell Investments.
"As well, we observed a significant spike in the correlations of
stocks, and when that happens it is very challenging for active
managers to add value. There were few places to hide, when 74 per cent
of the stocks in the Index declined in the quarter. For many investment
managers, benchmark-relative performance in the quarter was their worst
Wylie, who has interviewed hundreds of investment managers during her
career, went on to add that the fourth quarter is off to a positive
start. "Many of the hardest hit stocks in the third quarter rebounded
in October from the lows, and this is already translating into
significantly stronger performance for many of those investment
managers who struggled so much in the third quarter."
"Examples of stocks rebounding include Suncor Energy Inc, which was down
29 per cent and the top negative contributing stock in the third
quarter, and is up 19 per cent in October. Almost 80 per cent of
investment managers hold the stock so the performance has a notable
impact on performance," said Wylie. Other widely held stocks that hurt
manager performance in the third quarter but are now rebounding include
Canadian Natural Resources, down 24 per cent but up 14 per cent in the
fourth quarter; Manulife Financial, down 29 per cent in the third
quarter but up 10 per cent so far in the fourth; and Teck Resources,
which was down 37 per cent in the third quarter but up 29 per cent so
far in this quarter.
Wylie also noted that gold stocks underperformed in October after strong
performance in the third quarter. Large cap managers in Canada are
underweight golds by almost 5 per cent on average.
Seventy-four per cent of dividend-focused investment managers beat the
S&P/TSX Composite in the third quarter. This compares with 100 per cent
of dividend managers beating the benchmark in the second quarter. "The
only two sectors to post positive returns in the third quarter were
Telecommunications and Utilities and dividend managers are overweight
both those sectors," said Wylie. Overall dividend-focused managers were
favourably positioned in seven out of 10 sectors.
"What I found particularly interesting is how well dividend managers
performed in the third quarter despite the strength in gold stocks." In
the quarter, six of the top 10 contributing stocks were golds. Dividend
managers on average were almost 8 per cent underweight gold stocks at
the start of the quarter, but those positions were offset to a certain
extent by their significant overweights to BCE and Enbridge, which were
also among the top contributing stocks."
Growth Managers Struggle Most in the Third Quarter
Growth managers were hit hardest in the third quarter with only 12 per
cent able to beat the benchmark, down from 67 per cent in the second
quarter and the lowest on record. Value managers were slightly better
with 30 per cent beating the benchmark, down from 66 per cent in the
"Growth managers were underweight the five sectors that outperformed and
overweight the five that underperformed, so nothing went right for them
in terms of sector positioning," said Wylie. "As well, their stock
positioning was not favourable due to large negative contributors such
as Royal Bank, Potash Corp, Teck Resources and Suncor Energy, which
were all more widely held by growth managers and at overweight
positions. On a positive note, top-contributing stocks such as Barrick
and Goldcorp tended to be more widely held by growth than value
managers and at larger weights."
So far in the fourth quarter, performance looks like it might be
rewarding growth managers, who are more favourably positioned in eight
out of 10 sectors compared to value managers. Energy is among the top
performers and the largest contributor to the S&P/TSX Composite return.
Growth managers have a slight overweight to Energy while value managers
are underweight. As well, the stocks that have rebounded most in
October tend to be more widely held by growth managers.
"With only three sectors outperforming so far in October, sector breadth
is narrow, which often makes for a challenging active management
environment. However, stock selection was the key driver in October
based on the returns I've seen," said Wylie. "While it is early in the
quarter, the tone has certainly improved compared to the third quarter,
even though the last couple of days have been challenging. Although the
volatility continues, the market is in positive territory and
fundamentally strong companies that are trading at good valuations were
rewarded in October."
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information on Russell Investments please contact us at 1-888-509-1792.
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