Strong Resource-Driven Market Tough to Beat - According to Russell Investments
Russell Canadian Active Manager Report Highlights
-- Only 18% of Canadian large cap investors outperformed the
S&P/TSX Composite Index in the third quarter
-- Surge in gold stocks particularly challenging for
-- Energy and Materials lagging so far in the fourth quarter
points to a more favourable active management environment
TORONTO, Nov. 1, 2012 /CNW/ - It was a good news/bad news story in the third
quarter of 2012. The good news is that the S&P/TSX Composite Index rose 7.0%
in the period - the largest quarterly increase since the fourth quarter of
2010. The bad news is that only 18% of large cap managers in Canada
outperformed the benchmark Index - the lowest on record according to the
latest Russell Investments Active Manager Report. That was down from 69% in
the second quarter.
"The median large cap manager returned 5.8% in the third quarter, which was a
strong return," highlights Kathleen Wylie, Head, Canadian Equity Research at
Russell Investments, "but that return was notably behind the S&P/TSX Composite
Index's return as most managers struggled to beat the benchmark. For that
reason, we describe it as a challenging active management environment."
The Russell Active Manager Report is produced quarterly and is based on
recently released data from more than 140 Canadian institutional equity
With only three out of 10 sectors beating the S&P/TSX Composite Index in the
third quarter, the narrow sector performance, led by Energy and Materials,
made it challenging for active managers to keep up with the benchmark return.
"Large cap managers on average are 5% underweight Materials and nearly 2%
underweight Energy stocks, so when those two sectors run, these managers
struggle to beat the benchmark," says Wylie. The Energy and Materials sectors
combined accounted for 2/3 of the S&P/TSX Composite Index's return in the
Style Differences Mainly Driven by Gold Stock Performance
Gold stocks rose 18% in the third quarter, the largest quarterly gain since
the second quarter of 2010 and following three consecutive quarterly declines.
This explains much of the underperformance by active managers. "Large cap
managers on average are more than 4% underweight gold stocks so when these
stocks surge, active managers tend to struggle relative to the benchmark since
gold stocks have such a large weighting in the Index," highlights Wylie. At
the start of the third quarter, gold stocks, a sub-sector of the Materials
group, accounted for 10% of the S&P/TSX Composite Index, which is down from a
peak of 14% three quarters earlier. Dividend-focused managers on average were
almost 8% underweight gold stocks, so they were most negatively impacted. That
compares to value managers who were roughly 6% underweight and growth managers
who were only 1% underweight at the start of the third quarter. Goldcorp Inc.
was among the top-contributing stocks in the quarter, with its price rising
18%, and was held by 26% of dividend-focused managers, 34% of value managers
and 73% of growth managers.
"All styles lagged the benchmark in the third quarter," highlights Wylie, "but
growth managers lagged by less. They were helped by having a slight overweight
to Energy and less of an underweight to Materials stocks, including gold." In
the quarter, 27% of growth managers beat the benchmark with a median return of
6.1% while only 16% of value managers beat the benchmark with a median of 5.7%.
Not one dividend-focused manager was able to beat the S&P/TSX Composite
Index's return in the third quarter. The median return of 4.5% was well behind
the S&P/TSX Composite Index's return of 7.0%. Dividend-focused managers tend
to have large underweights to resources so the strength in Energy and
Materials hurt their relative performance. On average dividend managers were
12% underweight Materials and nearly 4% underweight Energy at the start of the
quarter. "The magnitude of underperformance of dividend-focused managers may
come as a surprise to many," suggests Wylie, "but keep in mind that these
managers tend to have larger sector bets compared to other styles, which can
result in larger swings in performance relative to the benchmark. As well,
they have performed extremely well since the start of 2011 as investors
favoured more defensive strategies."
Environment More Favourable So Far in the Fourth Quarter
The first four weeks of the fourth quarter appear to be more favourable for
active managers, with more sector breadth as six out of 10 sectors are ahead.
The Energy and Materials sectors are lagging so far in the quarter. "Large cap
managers have their largest underweight to Energy and Materials so it helps
that these sectors are underperforming," says Wylie. As well, large cap
managers on average are overweight the top-performing Industrials, Consumer
Staples and Consumer Discretionary sectors so that positioning is benefitting
their benchmark-relative performance. "It's too early to make a call on the
environment," cautions Wylie, "but with resources, including gold, lagging,
it's promising for active managers."
In terms of style, since dividend-focused managers have significantly larger
underweights to resources, the environment may be tilted back in favour of
their style again. As it stands, they are favourably positioned in eight out
of the 10 sectors.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few
firms that offers 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 market insights, manager research, portfolio
construction, portfolio implementation and indexes.
Russell has about C$157 billion in assets under management (as of 9/30/2012)
and works with 2,400 institutional client and more than 580 independent
distribution partners 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 also calculates approximately
700,000 benchmarks daily covering 98% of the investable market globally, 85
countries and more than 10,000 securities. Approximately $3.9 trillion in
assets are benchmarked to the Russell Indexes.
Russell is headquartered in Seattle, Washington, USA, and has offices around
the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London,
Melbourne, Milan, New York, Paris, 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 @Russell_News.
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.
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Copyright © Russell Investments 2012. All rights reserved. This material is
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SOURCE: Russell Investments Canada Limited
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