The median Canadian large cap manager return of 19.1% during the second quarter of 2009 was the highest since the first quarter of 1987, according to results from the latest Russell Active Manager Report.

The quarterly report analyzes institutional investment managers.

“Considering the fact that sector performance was narrow with only three out of 10 sectors beating the benchmark during the second quarter, active managers did very well in that environment,” says Kathleen Wylie, senior research analyst at Russell Investments Canada Ltd..

However, the return was not quite high enough to beat the S&P/TSX composite index’s near-record second quarter return of 20%. Only 38% of large cap managers beat the benchmark during the second quarter, up slightly from 36% in the first quarter.

Although information technology was the top-performing sector in the quarter (+43%), the strength in the financials sector (+35%) accounted for almost half of the index gain.

“Active managers generally have been moving back into the Financials sector. As a result, they had a modest overweight to Financials, on average, so that certainly helped performance in the quarter. As well, managers have been moving out of the Materials sector during the last couple of quarters and have more-than-doubled their underweight. This strategy paid off in the second quarter, since the Materials sector underperformed,” says Wylie.

Many large cap managers were hurt during the second quarter by being underweight in the energy sector, which was the third-best performing sector.

“Overall sector positioning hurt active managers in the second quarter given that large cap managers on average were only favourably positioned in three out of 10 sectors. However, they were able to mitigate some of the unfavourable positioning with stock selection, particularly by investing in Canadian banks, which are very popular with Canadian large cap investment managers and were strong performers in the quarter,” says Wylie.

“The top-contributing stock in the second quarter was Royal Bank of Canada, which is held by 90% of Canadian large cap managers and was up 29%.”

Value managers benefit from strength in the financials sector

After lagging growth managers in the first quarter of 2009, 57% of value managers beat the benchmark in the second quarter compared to just 40% of growth managers. That compares to 37% of value managers and 47% of growth managers in the first quarter of 2009. The median value manager return in the second quarter was 20.7%, which was ahead of the median growth manager return of 19.7%.

“Stock selection was key in the quarter and it appears that what value managers did not hold was as important as what they held. For example, six out of 10 of the bottom-contributing stocks were gold companies and with the exception of Barrick Gold, those stocks tend to be more widely held by growth managers than value managers, and at larger weights,” Wylie says.

On average, value managers were 2.5% overweight the financials sector compared to growth managers, who were roughly 4.5% underweight at the start of the second quarter.

“Value managers tend to own more life and health Insurance companies compared to growth managers and those were also strong contributors to the index performance during the second quarter, rising by 40%,” says Wylie.

IE