While the S&P/TSX Composite Index fell roughly 3.5% during the first three months of the year, the average active large cap Canadian equity manager fell short of the benchmark by almost one-half of 1%, according to Frank Russell Canada Ltd.

“Following a trend that started after the stock market hit its 52-week low in October of last year, the average active Canadian equity manager continues to have a difficult time beating the broad market returns,” said Paul Carter, senior research analyst at Russell Canada. “Unlike the fourth quarter of last year, which saw active managers’ Technology underweight as being the main culprit for poor relative performance, managers’ woes in the first quarter were largely due to one stock: Quebecor World.”

Commercial print media services company, Quebecor World, which most investment managers held large positions in because they felt it would be among the top beneficiaries of an economic recovery, fell over 40% in the quarter because of executive departures at the firm and a negative earnings surprise.

The average large cap manager’s return was -3.9% during the first quarter, with both the average growth manager (-3.9%) and the average value manager (-4.6%) faring worse than the index.

Beyond Quebecor World, the other key negative influence on large cap manager returns this quarter was the propensity of investment managers to underweight the largest stocks in the index in favour of mid- and small-cap stocks. Small, mid and large-cap stocks (as represented by the S&P/TSX SmallCap, MidCap and 60 Indices, respectively) started off the year rather equally. However, active Canadian equity managers suffered when mid-cap and small-cap stocks fell roughly 6% each while large cap stocks fell only 2% during February and March.

On the other hand, managers’ underweight position in the Gold sector (-19.6% return) helped their returns significantly. Beyond falling bullion prices, a large reason for the Gold index’s decline was the -46% return for Meridian Gold. The company has drawn investors’ ire after residents of Esquel, Argentina voted against Meridian’s plans for a mine near the town in a non- binding referendum. Few managers hold the stock.

Growth managers benefited in the quarter from their relative overweights in the many Technology and Health Care stocks that rebounded significantly from a dismal 2002. For instance, after falling between 50% and 80% in 2002, Zarlink Semiconductor (+49% in the first quarter), Nortel Networks (+23%) and Biovail (+40%) helped out many growth-oriented managers.

Despite value managers’ underperformance relative to growth managers in the first quarter, for the twelve months ending March 31, 2003, the average value manager’s return of -15.1% was well ahead of the average growth manager’s return of -18.5%.

Active management was a winning strategy for bond investors in the first quarter of 2003, as 78% of the managers in the 55 member Frank Russell Canadian Fixed Income Universe outperformed the Scotia Capital Universe Bond Index. The median manager outperformed the index by 14 basis points, with the average manager outperforming by 27 basis points.

Corporate bonds were a major factor in explaining the positive results, as the sector returned more than Government of Canada, Provincial, and Municipal bonds for the second straight quarter. Despite weak equity markets, attitudes towards corporate debt continued to improve as companies worked to repair their balance sheets.

Another area of strength in the Canadian debt market was the performance of real return bonds. The sector has benefited from growing interest from institutional managers, who have been looking outside of traditional fixed income investments to add value.

Despite protracted geopolitical uncertainty throughout the quarter, active bond managers in general did not increase portfolio duration. In fact, firms that outperformed tended to have a shorter-than-index bias, due to an outlook of improving economic fundamentals in the latter half of the year. This view shielded investors from the poorer performing longer maturity segments of the bond market.

http://www.newswire.ca/releases/May2003/12/c0781.html