The number of large-cap active investment managers in Canada that beat the returns of the S&P/TSX composite index in the first quarter (Q1) of 2016 plunged to 41% from the 82% that accomplished the feat in Q4 2015, according to Toronto-based Russell Investments Canada Ltd.’s quarterly active manager report.
The median active manager’s return was 4% while the benchmark index provided returns of 4.5%. Specifically, the strong market rebound at the end of Q1, especially in the energy sector and among gold stocks, made it difficult for most active managers surveyed to beat the benchmark, says Kathleen Wylie, head of Canadian equity research at Russell, in a statement released on Thursday.
“Gold stocks surged [by] a record 39% in the quarter, and even though large-cap managers are only 2% underweight, it still hurt their benchmark-relative performance because of the magnitude of the increase,” she explains. “Renewed strength in energy stocks also added to the challenges since large-cap managers on average are about 3% underweight.”
Large-cap active managers were positioned favourably in only four of 10 sectors in Q1. They were overweight in only two of the five outperforming sectors — utilities and consumer staples — and underweight in financials and health care, two of the underperforming sectors. (Materials and telecommunications led the other sectors in growth, up by 20% and 11.5%, respectively, and managers were underweight in both on average.)
The median return of 5.5% produced by dividend managers trumped that of the median value manager (4.1%) and the median growth manager (2.6%). Approximately two-thirds (67%) of dividend managers beat the benchmark compared with 44% of value managers and 17% of growth managers.
Dividend managers’ overweight positioning in the outperforming sectors of telecommunications, utilities and consumer staples offset their underweight status in gold, which surged at the end of Q1. Furthermore, their position in diversified bank stocks was also helpful as those equities were up by 5.4% in Q1 even though the financials sector underperformed, as a whole.
“On average, large-cap managers in Canada were underweight the banks heading into the quarter because they are such a large weight in the index, at 23%,” says Wylie, “but dividend managers have the smallest underweight at less than 3% compared to 8% underweight on average for value managers and [almost] 6% for growth [managers].”
The Russell report also points out that Q2 is not looking favourable for active managers as only three of 10 sectors beat the benchmark in April. Large-cap managers appeared to be positioned favourably in only two of the 10 sectors. As well, large-cap managers, on average, are underweight in the three outperforming sectors of health care, materials and energy and are overweight the most, on average, in consumer discretionary and information technology, which underperformed in April. Benchmark-relative performance was hurt by strength in gold, which was up more than 29% for the month.
“It’s not looking like a great start to the second quarter for active managers in terms of beating the benchmark,” says Wylie, “but the situation can change quickly. Early indications show a tilt back toward growth managers due to their more favourable positioning in the top three performing sectors.”
Although the Russell report indicates pessimistic results for active managers in Q1, Wylie says Canadian active managers have proven their worth over longer-time horizons as 71% of large-cap managers, on average, have beaten the benchmark 2011 and 2015, with the median large-cap active manager outperforming the index by an average of 270 basis points.
Russell’s quarterly report is based on a survey of 148 Canadian institutional money manager products.
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