Best Active Management Environment on Record in Canada in the Second Quarter - according to Russell Investments Canada Limited

Russell Canadian Active Manager Report Highlights

• 96% of large cap managers beat the S&P/TSX Composite Index in the second quarter of 2013
• Growth managers lead but all styles outperform
• Market positive so far in Q3 but active managers may be struggling to beat the benchmark

TORONTO, Aug. 1, 2013 /CNW/ - Although the second quarter of 2013 was challenging, with the S&P/TSX Composite Index falling by 4.1%, most large cap active investment managers in Canada added value and beat the benchmark. In the second quarter, 96% of large cap managers outperformed the S&P/TSX Composite Index, significantly more than 79% in the first quarter and the highest percentage on record.

The Russell Canadian Active Manager Report is produced quarterly and is based on recently released data from more than 150 Canadian institutional equity investment manager products.

"No one likes to lose money, but on a positive note, this was the third consecutive favourable active management environment," highlights Kathleen Wylie, Head, Canadian Equity Research at Russell Investments Canada Limited. The median large cap manager return was -1.5%, which was 2.6% ahead of the benchmark S&P/TSX Composite Index's return.

"We have not seen quarterly alpha that strong since the first quarter of 2001, when active managers benefited from being significantly underweight Nortel Networks, which reached a peak of nearly 35% of the Index weight in 2000 and plummeted in 2001, along with the technology sector," says Wylie.

Active managers benefited from good sector breadth in the latest quarter with seven out of 10 sectors beating the benchmark. "Our quarterly observations are that whenever there are seven or more sectors beating the benchmark, that tends to result in a favourable environment for active managers generally in terms of beating the benchmark. We've had good sector breadth now for three consecutive quarters and that has coincided with good active management environments."

In the second quarter, large cap managers on average were favourably positioned in seven of the 10 sectors. Overweights on average in Consumer Staples, Consumer Discretionary, Information Technology and Industrials combined with underweights in the Telecommunications, Utilities and Materials sectors were all positive for benchmark-relative performance.

Among the top-contributing stocks in the second quarter were Manulife Financial, which rose 13% and was held by 70% of large cap managers. As well, Magna was a top contributor, up 26% and held by 61% of large cap managers. Rogers Communications Inc. was a detractor for many investment managers, with the stock falling nearly 20% in the quarter and 63% of large cap managers holding it.

Gold Stocks Fell Again

The performance of gold stocks had a significant impact on the investment manager performance in the second quarter with the S&P/TSX Gold Index plunging nearly 33%. "On average, large cap managers in Canada were nearly 4% underweight gold stocks at the start of the quarter, so the gold stocks' extreme underperformance had a notable impact on benchmark-relative performance once again," says Wylie. "When gold stocks hit a peak of 14% of the Index weight in 2011, investment managers were on average 6% underweight, so relative performance was even more sensitive to gold stock performance." After declining for three consecutive quarters, the weight of the gold sub-industry declined to 6% of the Index by the end of the second quarter.

For the second consecutive quarter, Barrick Gold was the largest negatively contributing stock to the S&P/TSX Composite Index, falling nearly 44%. At the start of the second quarter, 47% of large cap managers held the stock at an average weight close to the Index weight. The second-largest negatively contributing stock was Goldcorp, which declined 23% and was held by 54% of large cap managers at a slight overweight on average. Of the top 10 negatively contributing stocks in the second quarter, five were gold companies.

Growth Leads All Styles

Although all styles of active management beat the benchmark, the median growth manager return of -1.1% was better than the median return of value and dividend-focused managers, both at -1.5%. In terms of percentage of managers beating the benchmark, all growth and dividend managers beat the benchmark, followed by value managers with 94% ahead. "Growth managers have lagged value and dividend managers during most quarters in the last five years so it was good to see them slightly ahead," highlights Wylie. "There have only been three other quarters during the five-year period where they have fared better based on median returns, so their style has generally been out of favour."

Although growth managers tend to have larger weights in gold stocks, which would have hurt their relative performance, they benefited from having a slight overweight in the top-performing Health Care sector compared to value and dividend-focused managers that were underweight on average. Valeant Pharmaceuticals was the top-contributing stock to the S&P/TSX Composite Index's return, up 19%, and it was held by 63% of growth managers at the start of the quarter compared to only 15% of value and 4% of dividend managers. As well, growth managers on average were almost 3% overweight the Energy sector, which outperformed. Value and dividend managers were underweight energy stocks on average.

Dividend managers were hurt by their overweights to the Utilities and Telecom sectors, which underperformed along with the Materials sector.

"The performance differences across the different styles of active managers were minimal this quarter," notes Wylie, "but it's important to remember that there are many quarters in which there are extreme differences, and that styles come in and out of favour, so a multi-manager approach to investing is the best way to reduce volatility."

Market up but Large Cap Managers May be Lagging

The S&P/TSX Composite Index has bounced back more than 4% so far in the first four weeks of the third quarter, but a strong rebound in gold stocks and less sector breadth may be making it challenging for large cap managers to beat the benchmark. Only three sectors are outperforming with Materials among the top-performing sectors. Large cap managers on average are underweight Materials although their underweight position has declined in recent quarters. Large cap managers overall are only favourably positioned in five sectors so sector positioning is neutral. They are likely benefiting from their average overweight to the outperforming Consumer Staples sector due to the Loblaw/Shoppers deal, but they also have overweights to Consumer Discretionary, Industrials and Information Technology, which are all underperforming.

"I've seen a few returns from managers so far in the third quarter and it looks like it might be stock selection that is driving performance more than sector positioning, because benchmark-relative returns have been positive based on a limited sample," highlights Wylie.

In terms of style, it appears that either growth or value managers are leading.  Growth managers have a smaller underweight to Materials than value or dividend-focused managers, so that may be helping their performance. With gold stocks rebounding, dividend and value managers are likely struggling since they have larger underweights than growth managers. "Earlier last week it looked liked growth managers might be leading the other styles since Energy was among the top-performing sectors and they have an overweight position on average, but more recent data shows Energy underperforming, which would hurt growth managers. It's just too early to make a call." says Wylie.

"Although the third quarter may be a bit more challenging for active managers to beat the benchmark compared to the last three quarters, the view of the investment managers we have met with recently is that the overall favourable active management environment will continue. Lower volatility and stock correlations combined with a reduction in the weighting of Energy and Materials stocks, including gold, in the S&P/TSX Composite Index, all bode well for active managers. The market is back to focusing on the bottom-up fundamentals of companies and the view is that investment managers who stick with their discipline and focus on owning quality companies, with good management trading at reasonable valuations, will continue to be rewarded," says Wylie. "Despite some challenging quarters in the last five years, the first-quartile manager has beaten the S&P/TSX Composite Index by almost 190 basis points on average per quarter, and over a longer 10-year period, the first-quartile manager return has averaged almost 150 basis points per quarter. Good active managers can add value."

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. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.

Russell has more than C$250.3 billion* in assets under management (as of 6/30/2013) and works with 2,400 institutional clients and more than 580 independent distribution partners globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.6 trillion in assets under advisement (as of 12/31/12). 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 $1.4 trillion in 2012 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, which includes more than 80 countries and more than 10,000 securities. Approximately $4.1 trillion in assets are benchmarked to the Russell Indexes.

Russell is headquartered in Seattle, Washington, USA, and has offices around the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London, Melbourne, Milan, New York, Paris, 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 @Russell_News. 

* Includes US$69 billion of derivative overlay assets under management not included prior to June 30, 2013.

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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-2013-07-25-0593 (EXP-07-2014)

SOURCE: Russell Investments Canada Limited

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