Russell Active Manager Report Highlights
59 per cent of value managers beat the S&P/TSX Composite Index compared
to 22 per cent of growth managers in the first quarter
Dividend-focused managers benefitted from strength in Financial Sector
Active management environment started the second quarter on a positive
TORONTO, May 4 /CNW/ - Geopolitical unrest and the earthquake in Japan
dominated the news headlines during the first quarter of 2011 leading
to a flight to safety, which benefitted investment managers who were
more defensively positioned. According to new data from the Russell
Active Manager Report, 59 per cent of Canadian large cap value managers
beat the S&P/TSX Composite Index's return of 5.6 per cent in the first
quarter of 2011 compared with just 22 per cent of growth managers. The
data is even more striking when compared to the fourth quarter of 2010
when 45 per cent of value managers and 74 per cent of growth managers
beat the index. Dividend-focused investment managers also performed
well in the quarter with 55 per cent beating the benchmark.
Underperforming Materials Sector Drives Outperformance of Value Managers
"The weakness in the Materials sector, particularly gold, was the key
contributor to value and dividend-focused manager outperformance. Value
managers were roughly 7 per cent underweight gold stocks and dividend
managers were almost 9 per cent underweight the stocks, so the 4.8 per
cent drop in the price of gold companies helped their performance,"
said Kathleen Wylie, Senior Research Analyst at Russell Investments,
who has interviewed and evaluated hundreds of investment managers
during her career. "Conversely, growth managers on average were roughly
3 per cent overweight gold stocks and given that three of the five
largest negative contributing stocks to the index return were gold
companies, that hurt their relative performance."
Teck Resources Limited was the most significant detractor from index
performance in the first quarter as the stock fell 17 per cent. Almost
80 per cent of growth managers held notable overweight positions in
Teck Resources at the start of the first quarter. In contrast, less
than 40 per cent of value and dividend-style managers had positions in
For the first time in a year, the Financials sector outperformed the
benchmark. With a return of 9 per cent, Financials was the top
contributing sector in the quarter. The strength in bank stocks were
key contributors to the sector's strength with Royal Bank of Canada and
Toronto Dominion Bank as the top two contributing companies. Both those
stocks are widely held by Canadian large cap investment managers but
the outperformance of the Financials sector was even more beneficial to
dividend-focused managers who had an overweight of roughly 8 per cent.
Value managers were also overweight Financials by 1.5 per cent while
growth managers on average were 5 per cent underweight the sector,
which detracted from their relative performance.
Historically, there have been some extreme differences when comparing
quarterly performance of value and growth managers, particularly in the
last two quarters. In the first quarter of 2011, the median value
manager return was strong at 6.3 per cent compared to the median growth
manager return of 4.9 per cent. Interestingly, in the fourth quarter of
2010, the situation was reversed with the median growth manager ahead
of value by 2 per cent. It is worth noting that growth managers had
beaten value managers for two consecutive quarters after lagging value
for almost two years.
"There are certainly periods where one style will dominate but over long
periods the two styles have had similar returns," said Wylie. "It's
impossible to predict when one style will be in favour at any given
time, so having a multi-style portfolio that includes more than one
style of investment manager will help to smooth out the swings and
Beating the Index More Challenging for Large Cap Managers Overall
Overall, the report found that only 39 per cent of Canadian large cap
managers were able to beat the index in the first quarter of 2011, down
from 52 per cent in the fourth quarter of 2010 but up from 34 per cent
in the third quarter. The median large cap manager return was 5.3 per
cent, behind the S&P/TSX Composite Index return of 5.6 per cent.
"Relative performance in the quarter was disappointing but not a
surprise given narrow sector performance with only four sectors beating
the benchmark." highlighted Wylie. Financials and Energy were among the
index's top-performing sectors and, combined, accounted for over 85 per
cent of the index return in the quarter. Large cap managers on average
had a small overweight to Financials but almost a 2 per cent
underweight to the Energy sector, which hurt their benchmark relative
performance. Overall, they were only favourably positioned in four out
of 10 sectors. Large cap managers still have their largest underweights
to Materials stocks (6 per cent underweight) so that would have helped
their benchmark relative performance in the quarter."
"Wylie added that the last couple of years have been particularly
challenging for Canadian large cap managers to beat the benchmark as
the market has been more influenced at times by macro events or
dominated by resources and less driven by company specific
fundamentals. Even in this challenging environment, 52 per cent of
large cap investment managers have beaten the benchmark on average per
quarter over the last 10 years and the median manager return is ahead
of the benchmark."
"The key," according to Wylie, "is identifying those managers who are
skilled in their selection of stocks and in how they construct their
portfolios giving them the potential to outperform the benchmark and
the median manager. In a typical market, these are the managers who
have added significant value above the benchmark as proven by history."
Second Quarter Starts On A Positive Note
Although the S&P/TSX Composite fell in the month of April, the active
management environment kicked off the second quarter of 2011 on a
positive note with good sector breadth. So far in the quarter, eight
out of 10 sectors are ahead of the benchmark with the Health Care
sector leading but Consumer Staples the second top-performing sector.
"Strength in Consumer Staples is positive for active managers who are
overweight the sector. As well, the Consumer Discretionary sector is
among the top-performers so far in the second quarter and large cap
managers in Canada have their largest overweights in that sector.
Overall, large cap managers are favourably positioned in six out of 10
sectors so that should be positive for their benchmark relative
performance, although how they perform in the end will depend on their
stock selection." said Wylie.
On a negative note, strength in the Materials stocks in April would have
hurt benchmark relative performance since Canadian large cap managers
have their largest overweight in that sector.
In terms of style, it appears to be tilted toward value again with value
managers more favourably positioned in seven out of 10 sectors with
Energy the largest negative contributing sector. "Value managers are
underweight Energy while growth managers are slightly overweight and so
far that favours value managers over growth. As well, Financials are
still outperforming, which should also help value managers who are
overweight the sector." said Wylie.
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