Russell Canadian Active Manager Report Highlights
- 74% of large cap managers beat the S&P/TSX Composite Index in the third quarter of 2013
- Value managers lead but all styles outperform again
- Q4 environment not so clear
TORONTO, Oct. 31, 2013 /CNW/ - For the fourth consecutive quarter, the majority of large cap investment managers in Canada added value and beat the benchmark. In the third quarter of 2013, 74% of large cap managers outperformed the S&P/TSX Composite Index, following a record 96% in the second quarter. In the third quarter, the median large cap manager return was 7.0%, compared to the S&P/TSX Composite Index's return of 6.2%.
"The last time we experienced four consecutive quarters in which large cap managers beat the benchmark was the second quarter of 2007 and overall that environment was not nearly as strong as what we've seen this time", highlights Kathleen Wylie, Head, Canadian Equity Research at Russell Investments Canada. "In the most recent four quarters, an average of 83% of large cap managers beat the benchmark with the median manager return ahead of the benchmark by roughly 150 basis points on average. That's significantly stronger than in 2007 when an average of 57% of large cap managers beat the benchmark in four consecutive quarters by an average of 30 basis points."
The Russell Canadian Active Manager Report is produced quarterly and is based on recently released data from more than 150 Canadian institutional equity investment manager products.
In the third quarter of 2013, there was less sector breadth than in the previous quarter, with only four out of 10 sectors beating the benchmark, down from seven out of 10 in the second quarter. "The performance in the third quarter was not driven by sector positioning," highlights Wylie, "as active managers were only favourably positioned in three out of 10 sectors. Normally, that would make for a challenging active management environment, but the performance of most investment managers was driven by stock selection, which we believe adds more value than sector bets in the long run."
Large cap investment managers in Canada on average are underweight the Energy sector, which outperformed the benchmark and was the 2nd highest contributor in the third quarter. Highlighting the importance of stock selection in the quarter was Suncor Energy Inc., which was up nearly 20%, and the top-contributing stock in the Index. It was held by 74% of large cap managers at an average overweight of more than 1%, so that helped their benchmark-relative performance.
Investment managers in Canada are also underweight the Financials sector on average, which was the third top-performing sector, but within Financials, managers were heavily weighted to the bank stocks so that would have benefited benchmark-relative performance. Toronto Dominion Bank was the second top-contributing stock in the Index, up 11% and held by 88% of large cap managers. Royal Bank of Canada was the third top contributor, up 9% in the quarter and held by 81% of large cap managers. Bank of Montreal, also a top contributor, is less widely held but was still owned by more than half the large cap managers at the start of the quarter. "Of the top 10 contributing stocks, five were banks," highlighted Wylie "and all of them were held by the majority of investment managers."
After declining for three consecutive quarters, gold stocks were strong in the quarter, up 8%. "Large cap managers on average are underweight the gold stocks relative to the benchmark weight, so that can make it challenging for managers to beat the benchmark when gold stocks rise," explains Wylie. "However, the weight of gold stocks in the Index at the start of the third quarter had dropped to less than 6% and large cap managers on average were only 3% underweight. That's a huge change from mid-2011 when the weight of gold stocks peaked at 14% and large cap managers on average were nearly 6% underweight on average."
Investment manager performance was also helped by what they did not own in the quarter. BlackBerry Ltd., formerly Research in Motion, fell 27% in the third quarter but was only held by 31% of large cap managers. Cameco was also a negative contributor, falling 14% but only held by 34% of large cap managers.
Potash Corp. is a stock that did not help active managers since it was the largest negative contributor and was held by 67% of large cap investment managers.
Value Slightly Ahead of Growth But All Styles Outperform
In the third quarter, 76% of value managers beat the benchmark compared to 75% of growth and 55% of dividend-focused managers. All manager medians were ahead of the benchmark: the median value manager return was 7.4%, the median growth return was 7.0% and the median dividend manager return was 6.5%. Sector positioning overall did not explain the differences in performance although value managers benefited most from having the largest overweight to the Consumer Discretionary sector, growth managers benefited from being overweight Energy on average, and dividend managers benefited from having the largest underweight to Materials.
The strength in gold stocks helped growth managers the most since they have the smallest underweight compared to the other styles. Growth managers were 2.6% underweight at the start of the third quarter compared to value managers who were 3.1% underweight and dividend-focused managers who were 4.1% underweight.
"Most quarters, it's easy to explain why one style did better than another but it really wasn't clear cut this quarter," says Wylie. "It just came down to stock picking and really there wasn't even a big difference between the highest and lowest manager return this quarter. The top performing manager return was 11.1% and the bottom return was 2.2% for a difference of just under 9%, which was the lowest in three years."
Fourth Quarter Looking Mixed So Far
Sector breadth has improved so far in the final quarter of the year with six out of 10 sectors ahead of the benchmark and large cap managers favourably positioned in five out of 10 sectors. The Energy and Materials sectors are underperforming, which should help large cap managers who are underweight on average. Large cap managers have their largest overweight in Consumer Discretionary stocks, which are outperforming. They are also likely benefiting from overweights to Consumer Staples and Industrials, with both sectors among the top performers.
By style, performance appears to be mixed so far in the fourth quarter. Value managers may be leading the way again compared to growth managers, with their overweights to Consumer Staples and Consumer Discretionary and their underweights to Energy and Materials helping. Growth managers are likely being hurt by their 2% overweight to the Energy sector, which is underperforming so far in the fourth quarter. Dividend managers are likely being helped by the underperformance of Energy and Materials and the outperformance of Financials and Utilities. They have their largest overweight in Telecommunication Services so how that sector ends up performing will impact performance.
"Right now things are changing day-to-day so it's difficult to get a clear picture but we are generally in a favourable active management environment," highlights Wylie. "I know that during the financial crisis, investors began to question the value of active management but the improvement highlights that over the long run it does add value. In the last 10 years, 55% of large cap managers have beaten the benchmark on average per quarter and the first-quartile manager return has beaten the S&P/TSX Composite return by 165 basis points on average per quarter. Even over five years, the numbers are exceptionally strong with the first quartile manager return ahead by 200 basis points on average per quarter."
Russell Releases Research Paper on the Canadian Active Management Environment
For a longer term perspective, Russell Investments has released a research paper titled "Equity Active Management in Canada: The Changes and the Challenges," which digs deep into the active management environment in Canada and explains what factors have had the largest impact on Canadian equity managers' ability to beat the benchmark in last five years and why the environment has improved in the last year. The paper can be found at www.Russell.com/ca.
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.
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