Almost three quarters of large cap Canadian equity active managers outperformed the S&P/TSX composite index in the fourth quarter of 2008, the latest Russell Active Manager Report has found.

The report shows that 72% of large cap Canadian equity active managers beat the index in the quarter, up from 65% in the third quarter. It marks the highest percentage since the second quarter of 2004.

“How managers performed during the fourth quarter really depended on their cash levels and their gold weighting,” said Kathleen Wylie, senior research analyst at Russell Investments Canada Ltd.

Wylie notes that managers who were underweight energy and financials—the two largest sectors—had positive results since those two sectors underperformed the index. The top-performing sector was consumer staples, but with a weight of less than 3% in the index, it did not have a significant impact.

“Although some market environments are more difficult than others for active managers, our data confirms that over the long run, active management does add value,” Wylie said.

Over the last 10 years, large cap Canadian equity investment managers have beat the benchmark by roughly 140 basis points per year.

Gold stocks were a significant factor in the fourth quarter, according to Wylie. Although the average active manager was underweight gold stocks overall, most large cap managers in Canada held Barrick Gold Corp. and Goldcorp Inc. at overweight positions on average, which helped their performance. These two companies were the top two contributing stocks in the S&P/TSX composite in the fourth quarter and for the year overall, Russell found.

Gold stocks rose 15.5% in the fourth quarter alone, which was almost 40% ahead of the S&P/TSX Composite return of -22.7%. By the end of the year, gold stocks accounted for 11% of the weight in the S&P/TSX composite—a larger weight than all but two sectors in the index.

Of all active managers in Canada, 68% beat the S&P/TSX composite, up from 47% in 2007 and the highest since 2004. The improvement in performance was attributable to the last two quarters of 2008, according to Russell.

In the first half of the year, active managers struggled relative to the benchmark as energy and materials dominated. Only 20% and 41% of investment managers beat the benchmark in the first and second quarters of 2008, respectively.

The median large cap manager return was -20.8% in the fourth quarter, which was ahead of the S&P/TSX composite return of -22.7%. For the entire year 2008, the median manager return was roughly 120 basis points ahead of the benchmark return, which was an improvement from 2007 when the median manager lagged the benchmark by roughly 25 basis points.

One factor that helped active managers in the latter half of the year was holding cash in portfolios. The report found that cash holdings rose from an average of 4% at the beginning of the third quarter to more than 5% during the fourth quarter.

“While 4%-5% may not sound like a significant amount of cash, when you have a market that was down 18.2% in the third quarter and down 22.7% in the fourth quarter, any amount of cash significantly benefited their benchmark-relative performance,” said Wylie.

After lagging growth managers and the benchmark for three years, value managers made a comeback in 2008. In the fourth quarter, 67% of value managers beat the benchmark compared to 60% of growth managers. That compares to 93% of value managers and 27% of growth managers in the third quarter.

For the year as a whole, value managers beat growth managers in three out of four quarters and were able post a median return that was ahead of the benchmark by roughly 3%.

The median value manager return was -29.8% for the year 2008 versus the median growth manager return of -34.2% and the S&P/TSX composite return of -33.0%.

Value managers benefited from having a larger overweight on average to top-performing Barrick Gold compared to growth managers, Wylie noted.

Owning Research in Motion and Potash Corp. hurt many growth managers, since most overweight both on average. RIM fell 31% in the fourth quarter and Potash fell 35%, making both among the top 10 negative contributing stocks.

The worst-contributing stock was Manulife Financial which was down 45% in the fourth quarter.

Into 2009, Wylie noted that small cap stocks appeared promising in January, with the S&P/TSX small cap index up 0.1% compared to the composite drop of 3%.

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