Active Management Rewarded Again - According to Russell Investments

Russell Canadian Active Manager Report Highlights

• 2012 kicks off with 66% of large cap managers beating the S&P/TSX Composite Index
  
  
• All styles outperform in the first quarter except growth -- value managers most rewarded
  
  
• Dividend-focused managers leading the way so far in the second quarter

TORONTO, May 2, 2012 /CNW/ - The favourable active management environment that ended 2011 has extended into 2012 with 66% of large cap Canadian equity investment managers outperforming the S&P/TSX Composite Index's return in the first quarter, according to the Russell Active Manager Report. That compares to 76% who beat the benchmark in the fourth quarter of 2011. The median large cap manager return was 5.3% compared to the S&P/TSX Composite Index's return of 4.4%.

"It was another excellent quarter for active managers overall," highlights 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 Active Manager 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," highlights 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.

Environment in the Second Quarter Favouring Dividend-Focused Managers

The S&P/TSX Composite Index is slightly negative, down 1% in the first four weeks of the second quarter and the environment overall for active managers is mixed. Sector breadth is positive with seven out of 10 outperforming the benchmark index but large cap managers are only favourably positioned in four out of 10 sectors. Outperformance of the Consumer Staples, Industrials and Consumer Discretionary sectors and underperformance of Materials is benefitting large cap managers overall but recent strength in the Energy sector is hurting since large cap managers on average are underweight the sector. Large cap managers have their largest underweights to the Energy and Materials sectors. "Of course it always comes down to stock selection," points out Wylie, "which we believe is the key driver of added value in the long run. It's early in the quarter yet and the situation changes day-to-day but it looks like Dividend-focused managers are being rewarded the most so far as they're favourably positioned in seven out of 10 sectors."

It appears that growth managers are struggling the most in April based on their sector positioning and returns in April. "That would make the third consecutive quarter that growth managers lagged other styles. It hasn't been the best market for growth managers generally in the last 3 ½ years," says Wylie, "but styles come in and out of favour over longer periods all the time so things will change; we just can't predict when."

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 offer actively managed, multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital markets insights, manager research, Indices, portfolio implementation and portfolio construction.

Russell has about C$155 billion in assets under management (as of 3/31/12) and works with 2,400 institutional clients, more than 580 independent distribution partners and advisors, and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 12/31/11).  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 $1.5 trillion in 2011 through its implementation services business. Russell calculates more than 80,000 benchmarks daily covering 98 percent of the investable market globally, 85 countries and more than 10,000 securities. Approximately $3.9 trillion in assets are benchmarked to the Russell Indices. 

Headquartered in Seattle, Washington, USA, Russell and has offices in around the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow us @Russell_News.

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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.

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RETAIL-2012-04-30-0148 (EXP-04-13)

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