Challenging start to 2014 for active managers: Russell

“We saw the trend reverse this quarter after seeing a string of five consecutive quarters of favourable active management environments and a 2013 that was overall the best year for active managers since 2001,” noted Kathleen Wylie, head, Canadian equity research at Russell Investments.

“There will always be periods in which active managers struggle, but in the long run they can add value. Over the last 10 years, in fact, an average of 55% of large cap managers have beaten the benchmark with the top quartile manager ahead of the benchmark by nearly 150 basis points per quarter on average.”

During the first quarter, five of 10 sectors beat the benchmark, but investment managers were only favourably positioned in four.

The top three performing sectors in Canada were healthcare, materials and energy and Canadian large cap managers were underweight all three at the start of the quarter.

Large cap managers had their largest overweight to consumer discretionary, information technology, and industrials, three underperforming sectors.

Value managers fared slightly better than growth and dividend managers in the first quarter, with 33% beating the benchmark. That compares to only 25% of growth and 15% of dividend managers beating the benchmark. The median value manager return was 5.5%, just slightly ahead of the median growth manager return of 5.4%. The median dividend manager return was 4.3%.

For the fifth consecutive quarter, small cap managers in Canada have beaten their large cap counterparts. In the first quarter, the median small cap return was 7.9% compared to the median large cap return of 5.5%. Small cap manager performance matched the S&P/TSX Small Cap Index return of 7.9%, ahead of the S&P/TSX Composite return of 6.1%. In the first quarter, 46% of small cap managers beat their benchmark, down from 92% in the fourth quarter.

Sector breadth in the small cap space was narrower, with only four sectors beating the benchmark and small cap managers on average underweight the outperforming sectors, which were energy, materials, healthcare and utilities.

Although it is still early, the environment for active managers appears to be more favourable so far in the second quarter, Russell Canada says.

Sector breadth is worse, with only three of 10 sectors ahead of the benchmark, but large cap managers are favourably positioned in six of them. Although energy is the top-performing sector and large cap managers on average are underweight, they are benefitting from their overweight to information technology and industrials which are both outperforming. Large cap managers have their largest underweights to the materials and financials sectors, which is helping their benchmark relative performance since both sectors are underperforming.

“It’s not clear which style is ahead so far this quarter,” says Wylie.

“It’s too early to tell because the environment is changing every day,” she says, “so it’s best to just stay the course and maintain a diversified portfolio.”