Russell Active Manager Report Highlights
- 76% of Canadian Large Cap Managers outperformed the S&P/TSX Composite Index - the highest in 7 ½ years
- All styles outperform but dividend-focused and value managers pull ahead
- Active managers optimistic about 2012
TORONTO, Feb. 1, 2012 /CNW/ - The year ended on a positive note for large cap Canadian equity investment managers, with 76 percent outperforming the S&P/TSX Composite Index's return in the fourth quarter of 2011 - the highest outperformance since the second quarter of 2004, according to the Russell Active Manager Report. That compares to only 40 percent who beat the benchmark in the third quarter, which was a very challenging quarter for many active managers. The median large cap manager return was 4.7 percent in the fourth quarter compared to the S&P/TSX Composite's return of 3.6 percent, the largest outperformance in three years.
"The focus came back to fundamentals, with many of the companies that were beat up in the third quarter rebounding strongly in the fourth, primarily in the month of October," highlights Kathleen Wylie, Senior Research Analyst at Russell Investments. "The market seemed to recognize that good companies, with good management, trading at reasonable valuations, should be rewarded."
Wylie points out that many of the top-contributing stocks in the fourth quarter had experienced significant declines in the third quarter when the market focused almost exclusively on macro factors. For example, the top-contributing stock was Canadian Natural Resources, which rose 24 percent in the fourth quarter after falling 24 percent in the third. As well, Royal Bank of Canada was a top contributor in the fourth quarter, up nine percent after falling 12 percent in the third quarter. Other examples of similar situations include Canadian National Railway Co. and Suncor Energy Ltd.
"These are among the most widely held names by Canadian equity investment managers," notes Wylie, "so their strong rebound in the fourth quarter had a significant positive impact on manager returns. More than 70 percent of the investment managers we research hold Canadian Natural Resources, Canadian National Railway and Suncor, and more than 80 percent hold Royal Bank, so those stocks were key factors in the strong active management environment." The Russell Active Manager Report covers roughly 140 Canadian Equity money-manager products and is produced quarterly.
"It was also a case of what managers didn't own that helped them beat the benchmark in the fourth quarter," says Wylie. "Gold stocks fell in the fourth quarter, and large cap managers on average were almost six percent underweight gold stocks at the start of the quarter. So the decline really benefited their benchmark relative performance." Kinross Gold was the largest negative-contributing stock in the benchmark index, falling 25 percent in the fourth quarter. However, only 29 percent of large cap managers held the stock. Agnico-Eagle was the second-largest negative contributing stock, falling 41 percent in the fourth quarter, but was held by only 14 percent of large cap managers.
Research in Motion was also a key negative contributor in the fourth quarter, falling 31 percent. Wylie notes that active managers have been moving out of the name, but RIM was still owned by 44 percent of investment managers at the start of the fourth quarter. "At the end of 2010, 66 percent of large cap managers held RIM so that shows how quickly the tide can change," she says.
Sector positioning had little impact on manager performance in the fourth quarter generally, with large cap managers on average favourably positioned in only four of the 10 sectors. "This highlights that it was all about stock-picking, which is what we believe is the key driver of performance in the long run," Wylie says.
All Styles Outperform in the Fourth Quarter
All styles of large cap managers beat the benchmark in the fourth quarter. For the third consecutive quarter, dividend-focused managers were rewarded most, with 94 percent outperforming the S&P/TSX Composite, followed by 75 percent of value managers and 59 percent of growth managers. Those numbers are higher than in the third quarter when 74 percent of dividend-focused, 30 percent of value, and only 12 percent of growth managers beat the benchmark.
"Since many of the top-contributing stocks were held by managers of all styles, what differentiated their performance was the gold positioning," highlights Wylie. "Value and dividend-focused managers reduced their weight in gold stocks during the third quarter as prices moved higher, so they became even more underweight, which helped in the fourth quarter." At the start of the fourth quarter, gold stocks accounted for almost 14 percent of the index weight and dividend-focused managers were 11 percent underweight, while value managers were nine percent underweight. By contrast, growth managers have increased their holdings in gold so were only one percent underweight gold stocks, which would have hurt their relative performance in the fourth quarter.
Stock Picking Still Expected to be Key in 2012
The S&P/TSX Composite has kicked off the year on a positive note, up almost five percent in the first four weeks of the year. "Active managers are optimistic that stock picking will continue to be rewarded," highlights Wylie. "Many companies that are profitable with solid earnings growth are trading at attractive valuations."
But it is difficult to tell how the active management environment is playing out so far in the first quarter of 2012, according to Wylie. "Sector breadth has narrowed and Materials are leading the way in performance. Normally that indicates a difficult active management environment but most of the returns I've seen have been ahead of the benchmark, so stock selection is likely driving performance again."
Sector positioning may be helping growth managers so far in 2012 as they were more favourably positioned in eight out of 10 sectors compared to value managers. With the more defensive sectors such as Telecommunication, Utilities and Consumer Staples all underperforming, it is likely that dividend-focused managers may be struggling.
"The bottom-line," highlights Wylie, "is that we can't predict which style is going to be the best performer since it changes quarter-to-quarter, and often there are extreme differences between the styles. The year 2011 was fueled by a thirst for yield and mostly risk-off trades, so dividend-focused managers were the most rewarded. A multi-manager, multi-style approach to investing will help to weather the swings."
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