2012 was best active management environment in a decade - according to Russell
Russell Canadian Active Manager Report Highlights
-- Median large cap manager more than 2% ahead of the S&P/TSX
Composite Index in 2012
-- Value style leads in the fourth quarter and for the year as a
-- Environment mixed so far in 2013
TORONTO, Feb. 5, 2013 /CNW/ - Although it was not an easy ride in 2012, large
cap managers posted their strongest benchmark-relative performance in a
decade, according to the latest Russell Investments Canadian Active Manager
Report. The median return was 9.4%, more than 2% ahead of the S&P/TSX
Composite Index's return of 7.2%. Using annual returns, 76% of large cap
managers beat the benchmark in 2012 compared to 50% in 2011 and 41% in 2010.
"I'm sure it was a surprise how well managers did overall in 2012, but when
you step back and look at each of the individual quarters, it was really only
the third quarter where managers struggled to beat the benchmark," highlights
Kathleen Wylie, Head, Canadian Equity Research at Russell Investments.
The Russell Canadian Active Manager Report is produced quarterly and is based
on recently released data from more than 140 Canadian institutional equity
The year started on a positive note when 66% of large cap managers beat the
benchmark in the first quarter of 2012, and then improved in the second
quarter when 69% beat the benchmark although the Index declined so investment
managers lost money.
"No one likes to lose money so the best situation for investment managers is
when the S&P/TSX Composite Index increases and investment managers
outperform," explains Wylie. "The first and fourth quarters were examples of
that win-win situation. In the fourth quarter, the index rose 1.7% and 81% of
large cap managers beat that benchmark, so that was the best of both worlds
and ended the year on a positive note."
The key factor that impacts relative performance among investment managers
tends to be how the Energy and Materials sectors perform. "Those two sectors
accounted for 46% of the S&P/TSX Composite Index's weight at the start of the
fourth quarter, and large cap managers on average have their largest
underweights to Energy and Materials. The performance of those sectors
typically has a significant impact on whether managers outperform or
underperform the benchmark," says Wylie. The Energy and Materials sectors
underperformed the Index in the first, second and fourth quarters and for the
year overall, so that helped managers beat the benchmark during those periods.
Value and dividend-focused managers tend to have the largest underweights to
Energy and Materials so they benefited most from the underperformance of those
two sectors. For the year, the median value manager return was 3.9% ahead of
the benchmark, and the median dividend-focused return was 2.2% ahead. Growth
managers lagged the Index for the second consecutive year. "On average, growth
managers were overweight Energy and only slightly underweight Materials so
that hurt their performance relative to value and dividend-focused managers."
Within Materials, gold stocks were also a factor, declining roughly 15% in
2012. Large cap managers on average were 5% underweight gold stocks throughout
the year, with dividend-focused managers more than 8% underweight, value
roughly 7% underweight and growth managers only about 2% underweight.
"What's really important to take away from this is that active management can
add value," stresses Wylie, "although there are periods when the environment
is more challenging. If you look back to the start of the financial crisis in
2008, there have been a number of quarters where macroeconomic shocks
dominated the headlines and company fundamentals were largely ignored. That
made it difficult even for skilled investment managers. But in periods where
there is a focus on company fundamentals, good sector breadth, less volatility
in the market and low correlations among stocks, skilled active managers who
stick to their discipline and focus on companies with strong fundamentals
trading at reasonable valuations, are expected to beat the benchmark." The
median manager return over the last 10 years was in line with the benchmark
return, but the top quartile manager was roughly 135 basis points ahead on
average per quarter. On average, more than 51% of large cap managers have
beaten the benchmark over the last 10 years.
Year Ends on a Positive Note
As noted, 81% of large cap managers beat the S&P/TSX Composite Index's return
in the fourth quarter—the highest since the second quarter of 2004. The
median manager return was 3.2%, well ahead of the Index return of 1.7%.
"Good sector breadth, with seven out of 10 sectors outperforming, combined
with the underperformance of Energy and Materials, including gold, helped
active managers close the year on a high," says Wylie. "All styles
outperformed in the quarter, including growth, but value managers came out on
top." In the fourth quarter, 97% of value managers outperformed compared to
89% of dividend-focused and 63% of growth managers. Value managers benefited
from their overweight to the three top-performing sectors: Consumer Staples,
Information Technology and Industrials. The median value manager return was
4.1% compared to 3.3% for dividend-focused and 1.9% for growth managers.
Royal Bank and Bank of Nova Scotia were the top two contributing stocks in the
fourth quarter and are widely held by large cap managers. Royal Bank rose 7%
and is held by 76% of large cap managers while Bank of Nova Scotia increased
8% and is held by 87% of large cap managers. Both stocks are popular with
value and dividend-focused managers.
Research in Motion (now BlackBerry), rose 57% in the quarter, which benefited
some investment managers. The stock is not as widely held as it once was with
only 19% of large cap managers holding it at the start of the fourth quarter
compared to 44% a year earlier. Value managers found the stock most attractive
but it was still only held by 33% of that group. Only 6% of growth and 13% of
dividend-focused managers owned the stock.
Value and Dividend-Focused Managers Still in Favour so far in 2013
During the first month of the year, the S&P/TSX Composite Index is up more
than 2% and sector breadth is positive with eight out of 10 sectors beating
the benchmark. However, with the Materials sector, including gold,
underperforming but Energy and Financials outperforming, the environment is
mixed for investment managers who are underweight all three sectors.
In terms of style, dividend-focused managers have significantly larger
underweights to Materials, so the environment may be tilted back in favour of
their style again, but value managers are also being rewarded. Once again, it
appears that growth managers are lagging.
"The growth style of investing has not been rewarded for most of the period
since the start of the financial crisis in 2008," highlights Wylie, "but that
will change eventually. No one style is in or out of favour all the time. It's
difficult to predict when that will change, so a multi-manager, multi-style,
multi-asset approach is best when investing."
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
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Russell has more than $162 billion in assets under management (as of
12/31/2012) and works with 2,400 institutional clients 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, which includes more than 80 countries and more than 10,000
securities. Approximately $3.9 trillion in assets are benchmarked to the
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