Value Investing Makes a Strong Comeback in Q1 2011 - According to Russell's Active Manager Report

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 note

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 the company.

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 lower volatility."

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.

For more information on the benefits of active management and for information on Russell Investments please contact us at 1-888-509-1792. For institutional clients, please contact us at 1-866-737-2228.

For access to the full Russell Active Manager Report, please contact Catherine Winchell at 416-640-6899.

About Russell Investments

Founded in 1936, Russell Investments is a global financial services firm that serves institutional investors, financial advisers and individuals in more than 40 countries. The firm has $156.5 billion in assets under management as at March 31, 2011 in its mutual funds, retirement products, and institutional funds.

Russell Canada was recently named the #1 fastest growing money manager in Benefits Canada's 2010 Top 40 Money Managers Report. For more information about how Russell helps to improve financial security for people, visit us at

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SOURCE Russell Investments Canada Limited

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