Plunge in oil stocks leads to widest range in manager returns since 2008: Russell

Using annual returns, 55% of large cap managers beat the benchmark in 2014, down from 94% in 2013, the best year since 2001. The median manager return was 11.3% in 2014, ahead of the S&P/TSX Composite Index return of 10.6%.

“It is worth noting that 2014 was the fourth consecutive year that the median large cap manager return exceeded the benchmark. During those four years, 69% of large cap managers outperformed the benchmark on average,” highlights Kathleen Wylie, head of Canadian equity research at Russell Canada.

Over the last 10 years, 57% of Canadian large cap managers have beaten the benchmark and the median manager return was roughly 80 basis points ahead of the S&P/TSX Composite Index return on average using annual returns.

Sector breadth improved in the fourth quarter with eight of 10 sectors beating the benchmark compared to seven of 10 in the third quarter.

Large cap managers were favourably positioned in six of 10 sectors, with overweights on average in four of the outperforming sectors and underweights to the underperforming energy and materials sectors.

However, within energy, Canadian Natural Resources and Suncor Energy were still widely held by large cap managers at the start of the quarter, hurting those managers’ benchmark-relative performance to some extent. Canadian Natural Resources, held by 79% of large cap managers, fell 16.9% in the quarter and Suncor Energy, held by 70% of managers, fell 8.3%.

Gold stocks dropped nearly 14% in the quarter, generally helping managers who were 2.5% underweight on average.

The energy sector accounted for 25% of the Index weight at the start of fourth quarter and had a negative impact on Index performance, as energy stocks fell 16% in the quarter. While investment managers were underweight the energy sector on average, those that were overweight generally struggled to beat the benchmark in the quarter, in some cases significantly underperforming the benchmark

The top large cap manager gained 15.9% in the fourth quarter, while the bottom performer lost 9.3%. This 25% gap between the top- and bottom-performing manager was the largest since the third quarter of 2008 when the financial crisis began and the energy sector plunged 27%.

Prior to 2008, the only other time a range in manager returns this wide occurred was in 2001 when Nortel Networks Corporation was in the midst of its significant decline. “Given the concentrated nature of the Canadian market, we occasionally get these extreme periods where one sector or even one stock can have a significant impact on the active management environment,” says Wylie.

Active management headwinds so far in 2015

The S&P/TSX Composite was up 0.5% in January but the active management environment looks less favourable so far in 2015 with only six of the 10 sectors ahead of the benchmark (compared to eight of 10 in the fourth quarter). Overall, large cap managers appear to be favourably positioned in only four of 10 sectors.

Large cap managers are being helped by their overweights in the information technology and consumer staples sectors, which are outperforming, and by underweights in the energy and financials sectors, which are underperforming. The health care and materials sectors are the top-performers so far this year, which are likely hurting large cap managers who are underweight on average.