Active Management Adds Value for the Third Consecutive Quarter - According to Russell Investments

Russell Canadian Active Manager Report Highlights

• 69% of large cap managers beat the S&P/TSX Composite Index in the second quarter
  
  
• All styles outperform in the second quarter led by dividend-focused managers
  
  
• Favourable environment appears to be extending into the third quarter

TORONTO, Aug. 9, 2012 /CNW/ - Although the second quarter of 2012 was difficult with the S&P/TSX Composite Index falling by nearly 6%, many Canadian large cap active managers were able to add value and beat the benchmark. In the second quarter, 69% of large cap managers outperformed the S&P/TSX Composite, up from 66% in the first quarter.

"Although no one likes a falling market, it was a favourable active management environment for the third consecutive quarter," highlights Kathleen Wylie, Senior Research Analyst at Russell Investments. The median manager returned -4.9% in the second quarter, which was ahead of the S&P/TSX Composite return of -5.7%.

The Russell Active Manager Report is produced quarterly and is based on recently released data from more than 140 Canadian institutional equity manager products.

"Since the financial market crisis in 2008 there have been many challenging periods for active managers where bottom-up company fundamentals were ignored by the market. This has led some investors to question the value of active management, but we know that in the long run, good companies with strong fundamentals trading at reasonable valuations, will be rewarded and managers with skills to find those companies and build portfolios will add value," says Wylie, who has interviewed and evaluated hundreds of investment managers during her career. She highlights that over the last 10 years, the median manager return was in line with the S&P/TSX Composite return but the top quartile manager was roughly 135 basis points ahead on average per quarter.

Large cap managers were helped in the second quarter by good sector breadth with seven out of 10 sectors beating the benchmark. Energy and Materials lagged the benchmark, which benefited active managers' relative performance since they tend to be underweight those sectors. Large cap managers on average were nearly 2% underweight Energy and 6% underweight Materials going into the second quarter. Large cap managers were also overweight the top-performing Telecommunication, Industrials and Consumer Staples sectors on average, which was positive for their performance relative to the benchmark.

Weakness in gold stocks, which fell 12% in the quarter, was also positive for active managers who are roughly 5% underweight the stocks on average.

Dividend Managers Benefit Most From Declining Resources

Dividend-focused managers were the strongest outperformers compared to other styles, with 83% beating the S&P/TSX Composite in the second quarter of 2012. The median return was -3.3%, which was 2.3% ahead of the benchmark. "It was a quarter where more defensive-type strategies were rewarded most, while high-beta growth strategies lagged," says Wylie.

Dividend managers were nearly 4% underweight Energy and 14% underweight Materials at the start of the quarter so underperformance of both those sectors benefited their performance relative to the benchmark and other styles of active managers. The decline in gold stocks benefited dividend managers most, given they were on average almost 9% underweight gold equities at the start of the quarter. By comparison, value managers were almost 7% underweight and growth managers were roughly 3% underweight gold.

Dividend managers tend to have their largest overweights in the Financials, Telecommunication and Consumer Discretionary sectors, which were all outperformers in the quarter. "Overall, they were favourably positioned in eight out of 10 sectors so the environment was in their favour as "safe-haven", less-cyclical securities were most rewarded," says Wylie.

In terms of stock selection, dividend managers benefited from owning BCE, which rose 6.5% and was the second top-contributing stock to the Index return in the second quarter. BCE is held by 88% of dividend managers compared to only 40% of value and 31% of growth managers who held the stock at the start of the quarter. Dividend managers were also helped by owning less Canadian Natural Resources (down 17.1%) and Suncor (down 9.3%) compared to value and growth managers.

Growth Managers Lag Other Styles for the Fourth Consecutive Quarter

Although growth managers lagged value and dividend-focused managers, their median return of -5.2% was still ahead of the benchmark return of -5.7%. Compared to value managers, they were only favourably positioned in two of 10 sectors and would have been hurt most by their overweight to Energy and by smaller underweights to Materials. They also were more heavily invested in Royal Bank, which was the top negative-contributing stock in the S&P/TSX Composite Index with a decline of -8.9%. More than 80% of growth managers held Royal Bank at an overweight on average compared to 73% of value managers who were underweight on average.

"The growth style continues to be out of favour," highlights Wylie, "but that will likely change. Styles come in and out of favour and those cycles may last as long as 3-4 years. Over the past 10 years, the median growth manager return is on average only 10 basis points behind the median value manager return, so not significantly different."

Third Quarter Starting on a Positive Note

While it is still too early to know with any certainty, the third quarter is shaping up to be another favourable environment for active managers despite less sector breadth with only four out of 10 sectors outperforming. Although the Energy sector is the top-performing sector, which would hurt active managers who are underweight on average, their average overweights to the outperforming Telecommunication, Industrials and Consumer Staples is helping along with their underweights to the underperforming Financials, Materials, Health Care and Utilities sectors. Overall, large cap managers are favourably positioned in seven out of 10 sectors.

It is less clear which style of active manager is winning so far in the quarter but it appears to be tilted toward either value or dividend-focused managers. Growth managers have a slight overweight to Energy, which would help, but defensive sectors that they do not tend to hold such as Telecommunication and Consumer Staples are still outperforming, which would favour dividend-focused and value managers.

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.

About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offer 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 markets insights, manager research, Indices, portfolio implementation and portfolio construction.

Russell has about C$155 billion in assets under management (as of 6/30/12) and works with 2,400 institutional clients, more than 580 independent distribution partners and advisors, and individual investors 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 calculates more than 80,000 benchmarks daily covering 98 percent of the investable market globally, 85 countries and more than 10,000 securities. Approximately $3.9 trillion in assets are benchmarked to the Russell Indices. 

Headquartered in Seattle, Washington, USA, Russell and has associates located in cities around the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London, Melbourne, Milan, New York, Paris, San Francisco, 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 us @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 2012. 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.

RETAIL-2012-08-03-0243 (EXP-08-2013)

SOURCE: Russell Investments Canada Limited

Media Contact:
416-825-2125

Russell Contact:
Catherine Winchell 416-640-6899

For real-time news updates, follow @Russell_News on Twitter.