Strong Resource-Driven Market Tough to Beat - According to Russell Investments

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
        dividend-focused managers
    --  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 
manager products.

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 or follow @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 

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.

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Media Contact:Beja Rodeck 416-825-2125 

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SOURCE: Russell Investments Canada Limited

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CO: Russell Investments Canada Limited
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-0- Nov/01/2012 12:30 GMT

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