Active investment managers in Canada had the toughest time beating the benchmark index in the second quarter (Q2), ended June 30, than in any quarter since 1999, according to Toronto-based Russell Investments Canada Ltd.’s quarterly report on active managers.
In fact, only 17% of Canadian large-cap equity managers surveyed beat the benchmark S&P/TSX composite index, which showed a gain of 5.1% during the period, its largest quarterly gain in two years. However, the median large-cap manager’s return, based on Russell Canada’s survey of 142 Canadian institutional products, was a much smaller 3.4%. The gap was the widest seen since Russell Canada launched its report in 1999.
“With the strength in gold stocks in the first two quarters of the year, their weight in the index has doubled since the end of 2015,” says Kathleen Wylie, head of Canadian equity research with Russell Canada, in a statement. “As most managers are generally underweight this sector, gold has become the latest concentration issue.”
Gold stocks surged by a record 41% in Q2, but large-cap managers were underweight on the index by roughly 3% on average. Four of the top 10 stocks were gold stocks, accounting for more than a quarter of the index’s gain. Barrick Gold Corp., was the top stock and was held by less than 20% of large-cap managers. The gains followed a 39% leap for gold stocks in the first quarter.
Still, the lag by active managers is not as severe as in 2011, when the weighting of gold stocks in the index peaked at 14%, and managers were underweight by an average of 6%, Wylie says.
Strength in the energy sector, led by gains in TransCanada Corp. and Enbridge Inc., also presented challenges for Canadian large-cap equity managers who were 3% underweight on energy on average.
On a positive note, 67% of large-cap managers held Canadian Natural Resources Ltd., which rose 15.7% during the quarter and was the second-best performing stock in the index.
Although Q2 marks the second consecutive quarter in which active managers have struggled to beat the index, Wylie says there were previously six consecutive highly favourable quarters for active managers through to the end of 2015.
“There will be periods in which active management struggles particularly in Canada with such a concentrated index,” says Wylie. “But over the past five years, including these challenging periods, an average of 61% of large-cap managers have beaten the benchmark by an average of roughly 50 basis points per quarter.”
All investment styles in the active management report struggled to beat the benchmark return of 5.1% in Q2, with a nominal difference in median returns. Dividend managers fared slightly better than other styles, with a median return of 3.5% compared with 3.4% for growth managers and 3.2% for value.
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