For the third consecutive quarter, Canadian small cap managers outperformed large cap managers, according to the latest Russell Active Manager Report.

The median small cap manager return of 19.5% in the third quarter of 2009 was more than 9% ahead of the median large cap manager return of 10.2%.

“This was the strongest outperformance of small cap managers relative to large cap since Russell Investments has been collecting this data, which began in 1988. It’s not a huge surprise given how strong small cap stocks performed during the quarter,” says Kathleen Wylie, senior research analyst at Russell Investments Canada Ltd.

The S&P/TSX Small Cap Index returned 21.9% in the third quarter, more than double the return of the broader S&P/TSX Composite Index return of 10.6%.

“On average, small cap managers had 20% of their portfolio in materials stocks compared to an average of 13% for large cap managers” says Wylie. The materials sector outperformed in both the S&P/TSX Composite Index and the S&P/TSX Small Cap Index in the third quarter.

41% of large cap managers were able to beat the S&P/TSX Composite Index in the third quarter of 2009, compared to the 38% of large cap managers that outperformed the S&P/TSX index in the second quarter. Only 36% of large cap managers outperformed the benchmark in the first quarter of this year.

“The trend is improving in terms of benchmark relative performance for large cap managers. However, it has been a challenging year, due in large part to narrow sector performance. Over the long run, active managers have outperformed the benchmark on average by almost 30 basis points per quarter,” says Wylie.

“Only 4 out of 10 sectors beat the S&P/TSX Composite Index return in the third quarter: health care, financials, materials, and industrials,” says Wyllie. “Large cap managers still have their largest relative weights in Consumer Discretionary and Consumer Staples companies, which also detracted from performance.”

Value and growth managers slightly ahead of benchmark

There was minimal difference between the performance of growth and value managers in the third quarter, with value managers slightly outperforming. The median value manager return was 11.0% compared to the median growth manager return of 10.7%. Roughly 54% of value managers were able to beat the S&P/TSX Composite Index’s return of 10.6%, compared to 53% of growth managers.

IE