For the first time since the second quarter of 2007, Canadian small cap managers outperformed large cap managers, according to results from the latest Russell Active Manager Report released Wednesday.

The median small cap manager returned -1% compared to -2.7% for the median large cap manager in the first quarter of 2009.

“That was the strongest outperformance of small cap managers relative to large cap in two years,” says Kathleen Wylie, senior research analyst at Russell Investments Canada Ltd.

“Small cap managers tend to have larger weights in the materials and information technology sectors compared to large cap managers and that helped their relative performance in the first quarter since those two sectors outperformed,” Wylie says.

“In addition, small cap managers tend to have a significantly smaller portion of their portfolio in financials compared to large cap managers and that, too, would have helped in the first quarter since financials struggled,” she adds.

Only 36% of large cap Canadian equity active managers beat the S&P/TSX composite index in the first quarter of 2009, which was down from 72% in the fourth quarter and 65% in the third. However, it was a better start to the year than in 2008 when less than 20% of active managers beat the benchmark.

“It was a tough quarter overall in terms of beating the benchmark. Within the quarter, it’s worth noting that 68% of managers outperformed in February when the S&P/TSX was down 6.3%. With 7 out of 10 sectors beating the benchmark during that month, managers found it a more favourable environment to beat the benchmark,” says Wylie.

“Although the first quarter was challenging for active managers, our data confirms that over the long run, active management does add value with large cap Canadian equity investment managers beating the benchmark by roughly 30 basis points per quarter over the last 10 years.”

The challenge for active managers overall in the first quarter was that the market was more narrow in terms of sector performance with only four out of 10 sectors beating the benchmark. In the first quarter, information technology was the top-performing sector followed closely by materials. Active managers on average are overweight technology but significantly underweight materials. Also, the energy sector outperformed the index in the first quarter and managers tend to be underweight that sector as well.

“The energy and materials sectors account for roughly 45% of the S&P/TSX weight so positioning in those sectors is key,” explains Wylie.

Within Materials, gold stocks were strong in the quarter, up roughly 4%. Interestingly though, Barrick Gold Corp did not participate in the strength with the stock down 8.7% making it the second largest detractor in the index.

“Barrick Gold Corp. is the most popular gold stock among large cap active managers with roughly 60% of managers holding it at an overweight on average so the underperformance of the stock hurt active managers overall in the first quarter”, says Wylie.

IE