Active management rewarded in first quarter: Russell

“It was another excellent quarter for active managers overall,” says Kathleen Wylie, senior research analyst at Russell Investments. “In fact, taking the fourth quarter into account, the back-to-back percentage of managers beating the benchmark was the highest since 2004. Fundamentals mattered in the quarter with the market focused more on company specifics and less on the macro environment.” On average over the last 10 years, 52% of large cap managers have beaten the benchmark.

The report is produced quarterly and is based on recently released data from more than 140 Canadian equity money manager products.

Sector positioning positively impacted manager performance in the quarter with large cap managers favourably positioned in six out of 10 sectors. Large cap managers benefited from having their largest overweight to the consumer discretionary sector, which posted the second strongest return at 14%. As well, their largest underweights continue to be in the energy and materials sectors, which both underperformed the S&P/TSX Composite index’s return.

Stock selection was also key in the quarter with the top three contributing stocks, Royal Bank (up 12%), Toronto-Dominion Bank (up 12%) and Bank of Nova Scotia (up 11%) widely held by at least 80% of large cap Canadian equity investment managers. At the start of the first quarter, Toronto-Dominion Bank was the most widely held name with 90% of large cap managers owning it at an average overweight of almost 1%.

“Suncor was another interesting name,” adds Wylie, “with the stock up 11% in the first quarter and 75% of large cap managers holding it. The stock struggled in 2011 when it was down 22% so it was quite a turnaround in the first quarter.” Suncor and Pacific Rubiales Energy Corp. were the only energy stocks among the top 10 contributors to the S&P/TSX Composite index’s return, as the energy sector declined slightly in the quarter.

The underperformance of gold stocks was also a factor in manager outperformance in the first quarter. Gold stocks declined 4.3% in the quarter with Barrick Gold and Kinross Gold among the largest negative contributors. Almost 60% of large cap managers own Barrick, which would have hurt their benchmark relative performance, but only 25% own Kinross Gold, which would have helped. Large cap managers on average continue to be underweight gold stocks, by 5%.

Value managers ahead, while growth managers lag

The performance of gold stocks contributed to the difference in performance between value and growth managers. Value managers on average were more than 7% underweight gold companies compared to growth managers who were only 2% underweight on average. In the first quarter, 90% of value managers and only 41% of growth managers beat the benchmark. That compares to 75% of value managers and 59% of growth managers in the fourth quarter. The median value manager return was 6.4% in the quarter, which was well ahead of the S&P/TSX Composite index’s return of 4.4% and the median growth manager return of 3.7%.

“It’s not unusual at all to have quarters like this where there are notable differences in performance between value and growth managers,” says Wylie. “In the long run, those styles tend to perform similarly but on a quarter-to-quarter basis, differences can be significant, which is why we recommend a multi-style, multi-manager approach to investing.”

Sector positioning and performance were key factors in value and growth manager performance, with value managers more favourably positioned in six out of 10 sectors. Overweights to consumer discretionary, information technology and consumer staples sectors were key contributors to value manager outperformance along with their larger underweight to materials. As well, value managers were underweight the underperforming energy sector while growth managers were overweight.

Dividend-focused managers on average also outperformed with a median return of 4.8%, and 61% of them finished the quarter ahead of the S&P/TSX Composite index’s return. Their 8% overweight to the financials sector, which rose 11%, combined with their 14% underweight to materials, were key factors contributing to their performance in the first quarter.