Active management environment improves in the third quarter: Latest Russell Investments Canada Limited Active Manager Report

• 53% of large cap managers outperform benchmark, a 12% increase from last quarter
• Dividend focused managers outperformed growth and value managers
• Active manager environment appears favourable so far in the fourth quarter

TORONTO, Oct. 30, 2014 /CNW/ - The active management environment continued to improve in the third quarter with more than half of large cap managers beating the S&P/TSX Composite Index, up from only 41% in the second quarter. The median return was -0.5%, slightly better than the S&P/TSX Composite Index return of -0.6%. These and other notable observations are included in the most recent Russell Investments Canada Limited ("Russell Canada") Active Manager Report, which is based on a quarterly survey of roughly 150 institutional money manager products (all data cited is gross of fees).

"The third quarter was a favourable active management environment for large cap managers after they struggled in the first half of the year," highlights Kathleen Wylie, Head of Canadian Equity Research at Russell Canada. "Despite the stock market decline in the quarter, more than 50% of large cap managers beat the benchmark, which we view as a favourable quarter for active managers overall. No one wants the stock market to fall, but not falling as much as the market can help benchmark-relative performance longer term." She noted that just over a third of large cap managers actually posted positive returns in the quarter, with the range in returns from the top- to bottom-performing managers fairly wide.

Wylie highlighted that, over the last 10 years, an average of 54% of large cap managers have beaten the S&P/TSX Composite Index per quarter. That number increases to 59% in the last five years.

Sector positioning positive overall for large cap managers

Sector breadth was significantly better in the third quarter with seven of 10 sectors beating the benchmark compared to only two out of 10 in the second quarter. Materials, Energy and Telecommunications were the three underperforming sectors, which helped large cap managers who are underweight each on average. Large cap managers were overweight four of the sectors that outperformed and underweight the three that underperformed so they were favourably positioned in seven of the 10 sectors.

"Normally, when you see sector breadth that high, particularly in a concentrated market like we have in Canada, it makes for an extremely favourable active management environment," highlights Wylie. "In the third quarter, however, large cap managers faced some challenges in their stock selection that offset some of the positive sector positioning."

Stocks selection hurt large cap managers

Of the top 10 stocks contributing to S&P/TSX Composite Index performance, only two were widely held by large cap managers. The top contributing stock, Canadian National Railway, up 14.9% in the third quarter, was held by 68% of large cap managers. The second top contributing stock, Royal Bank, rose 5.9% in the quarter and was held by 81% of large cap managers. Other top contributing names such as Canadian Pacific Railway, Valeant Pharmaceuticals, Tim Hortons Inc., and National Bank were held by less than 40% of large cap managers.

Also hurting benchmark-relative performance were the two largest negative contributing stocks, Suncor and Canadian Natural Resources Ltd. Suncor fell 10.4% in the third quarter and was held by 72% of large cap managers. Canadian Natural Resources fell 10.8% and was held by 77% of large managers. "Of the 10 largest negative contributing stocks, six were widely held by large cap managers," according to Wylie.

Dividend-focused managers shine as gold falters

Dividend-focused managers fared better than growth or value managers in the third quarter with 61% beating the benchmark compared to 58% of growth and 48% of value managers. The median dividend-focused manager return was -0.1% compared to -0.4% for growth and -0.6% for value managers. The biggest range in returns was in the growth universe where the top manager returned 4.0% and the bottom manager returned -11.4%.

Dividend managers benefited most from the 16.5% decline in gold stocks since they started the third quarter with the largest underweight of 4.2%, compared to value managers who were 3.4% underweight, and growth managers who were 1.8% underweight golds on average.

"Gold stocks took a beating in 2013, which resulted in their weight in the Index falling from 10% at the start of the year to nearly 5% by the end of the year. As a result, the performance of gold stocks does not impact large cap manager benchmark-relative performance as much, but does help to explain differences in relative performance of manager styles," highlights Wylie. Note that overall, large cap managers are now only 1.4% underweight, the smallest underweight since early 2007 and a notable difference from mid-2011 when large cap managers were nearly 6% underweight gold stocks on average.

Fourth quarter off to a favourable start for active managers

The fourth quarter is starting on a negative tone, with the S&P/TSX Composite Index on track to post a bigger decline than in the third quarter. However, sector breadth is wider with eight of 10 sectors ahead of the benchmark. The Energy and Materials sectors are still underperforming, which generally favours active managers due to their traditional underweight of these groups. Overall large cap managers appear to be favourably positioned in six of the 10 sectors so far in the quarter.

"It's difficult to tell this early if it will be a favourable environment for large cap managers in the fourth quarter given the volatility we're now experiencing," highlights Wylie. "It changes day-to-day so it could go either way. It's even harder to predict how styles will perform." Dividend managers appear to be benefitting from declining gold stocks again and the outperformance of the Telecommunications sector. Value managers are benefitting from outperformance of Consumer Discretionary and Consumer Staples since they have the largest overweights in those sectors. Growth managers are likely lagging the other styles based on their smaller underweight to gold stocks and overall sector positioning.

For more information on the benefits of active management and for information on Russell Investments please contact us at 1-888-509-1792. For institutional clients, please contact us at 1-866-737-2228.

About Russell Investments

Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell stands with institutional investors, financial advisors and individuals working with their advisors—using the firm's core capabilities that extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes to help each achieve their desired investment outcomes.

Russell has more than CAD$298.0 billion in assets under management (as of 6/30/2014) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has US$2.4 trillion in assets under advisement (as of 6/30/2013). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than US$1.6 trillion in 2013 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, including more than 80 countries and more than 10,000 securities. Approximately US$5.2 trillion in assets are benchmarked (as of 12/31/2013) to the Russell Indexes, which have provided investors with 30 years of smarter beta.

With Canadian headquarters in Toronto, Russell operates globally, including through its headquarters in Seattle, Washington and offices in New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Beijing, Toronto, Chicago, San Diego, Milwaukee, Montreal, Edinburgh and Vancouver.

Important Information

Nothing in this publication is intended to constitute legal, tax securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This is a publication of Russell Investments Canada Limited and has been prepared solely for information purposes. It is made available on an "as is" basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.

Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.

Unless otherwise stated all index data is sourced from ©BNY Mellon Asset Servicing.  All rights reserved.

Russell Investments and the Russell Investments logo are registered trademarks of Frank Russell Company, used under license by Russell Investments Canada Limited.

Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as Russell Investments.

Copyright © Russell Investments Canada Limited 2014. All rights reserved.

RETAIL-2014-10-28-1006.  Exp. October 2015

SOURCE: Russell Investments Canada Limited

Tim Benedict, 212.702.7823; Beja Rodeck Communications, 905.885.5945; For real-time news updates, follow @Russell_News on Twitter.