Favourable Active Management Environment Extends Into 2013 - according to Russell Investments Canada Limited

Russell Canadian Active Manager Report Highlights

• 79% of large cap managers beat the S&P/TSX Composite Index in the first quarter of 2013
• Value style leads again but all styles ahead in the quarter
• Market down  so far in Q2 but active managers overall outperforming and optimistic

TORONTO, May 1, 2013 /CNW/ - The favourable active management environment that was evident for most of 2012 has extended into 2013 with 79% of large cap Canadian equity investment managers beating the S&P/TSX Composite Index in the first quarter of 2013, according to the Russell Canadian Active Manager Report. That compares to 81% in the fourth quarter of 2012, which was the highest in 8 ½ years. The median large cap manager return was 4.7% in the first quarter of 2013 compared to the benchmark S&P/TSX Composite return of 3.3%.

"This sounds like a repeat of what we said a year ago at this time, but the environment was excellent for active managers in the first quarter of 2013," highlights Kathleen Wylie, Head, Canadian Equity Research at Russell Investments. "In fact, taking into account the fourth quarter of 2012, the back-to-back percentage of investment managers outperforming the benchmark was the highest since the middle of 2001 - even better than what we saw last year."

The Russell Canadian Active Manager Report is produced quarterly and is based on recently released data from more than 140 Canadian institutional equity investment manager products.

Gold Stocks Made a Difference

Good sector breadth during the first quarter was a key factor with eight out of 10 sectors outperforming the Index. However, the underperformance of the Materials sector, specifically gold stocks within Materials, benefited large cap managers. Gold stocks, as measured by the S&P/TSX Gold Index, fell 16% in the first quarter, the largest decline since the third quarter of 2008. That followed a decline of 13% in the fourth quarter of 2012. The declines in the first quarter were broad-based with 27 of the 31 gold miners included in the S&P/TSX Composite Index falling in price.

"The performance of gold stocks has a notable impact on the quarter-to-quarter relative performance of investment managers in Canada because it is such a large weight in the benchmark," says Wylie. At the start of the first quarter, gold companies accounted for 10% of the S&P/TSX Composite Index, and large cap managers on average were 4% underweight. With the decline in gold stocks during the first quarter, the Index weight of gold companies is now below 7%.

"Gold producers still have a large weight in the Index," explains Wylie, "but it has come down significantly from a peak of 14% in the third quarter of 2011 when large cap managers were on average nearly 6% underweight these stocks. Some of the most challenging quarters for active managers to beat the benchmark since the start of the financial crisis in 2008 were when gold stocks spiked. "

The largest negatively contributing stock to the S&P/TSX Composite Index return in the first quarter was Barrick Gold, which fell 14%. It was held by 46% of large cap managers in Canada. Goldcorp was also among the top five negative contributing stocks, and was held by 55% of large cap managers. Eldorado was a significant detractor in the first quarter when it fell 24% but was only held by 16% of large cap managers. Of the top 10 negatively contributing stocks, seven were gold companies. This benefited many investment managers who were void or underweight most of these names, especially value and dividend managers.

The top contributing stock in the quarter was Canadian National Railway, which rose 13%. The stock is widely held by 68% of large cap managers, who were slightly overweight on average, thus helping their benchmark-relative performance. The second-largest contributing stock was Valeant Pharmaceuticals, up 29% in the first quarter, but it was only held by 34% of large cap managers.

All Styles Outperform but Median Value Manager Return Leads Again

For the second consecutive quarter, all styles of large cap managers outperformed the Index. In the first quarter of 2013, the median value manager returned 5.6% compared to the median dividend-focused manager return of 5.3% and the median growth manager return of 4.3%. In terms of percentage of managers beating the benchmark, dividend-focused managers led the others, with 86% ahead compared to 85% of value managers and 75% of growth managers.

Value managers benefited from having large overweights to the Information Technology, Consumer Discretionary and Consumer Staples sectors, which all outperformed. Dividend-focused managers were helped by their overweights to the Industrials, Telecommunication and Financials sectors, which also outperformed. Growth managers have been hurt by their underweights to Financials and Telecommunications but helped by their overweight to the Energy sector, which outperformed in the quarter.

Small Cap Managers Well Ahead

Although the S&P/TSX Small Cap Index return of 0.6% lagged the S&P/TSX Composite return of 3.3%, small cap managers added value against both their benchmark and large cap managers in the first quarter. The median small cap return of 5.4% was ahead of the median large cap return of 4.7%. Small cap managers have notably larger weights in the Industrials, Consumer Discretionary and Information Technology sectors compared to large cap managers and those three sectors were strong performers in the small cap space, which benefited small cap managers.

In the S&P/TSX Small Cap Index, the Energy and Materials sectors were the only two sectors that declined, but those two sectors combined account for nearly 58% of the Small Cap Index weight. Small cap managers on average were 3% underweight Energy and 11% underweight Materials at the start of the first quarter, which benefited their benchmark-relative performance. Note that small cap managers have outperformed the S&P/TSX Small Cap benchmark for nine consecutive quarters. In most of the quarters, the Energy and Materials sectors underperformed so that has helped this benchmark-relative performance.

"There is significant alpha potential in small cap space," highlights Wylie, "with the median small cap manager ahead of the S&P/TSX Small Cap Index on average by140 basis points per quarter over the last 10 years."

Small cap managers tend to outperform large cap managers as well, with the median small cap manager return on average almost 80 basis points ahead of the median large cap manager return on average per quarter over the last 10 years. "There is definitely more volatility in small cap manager returns compared to large cap managers," says Wylie, "but investors with a long-term focus should consider a small cap manager allocation given their value-added potential."

Optimism About the Active Management Environment Continues

Although the market is struggling so far in the second quarter, with the S&P/TSX Composite down 4% led by Materials, including golds, the environment looks favourable for active managers in terms of benchmark-relative performance. Sector breadth is very good with nine out of 10 sectors outperforming.

"It's too early to call for sure," says Wylie, "but based on sector performance so far in the second quarter, active managers are favourably positioned in six out of 10 sectors. In terms of style, the environment seems to be tilted toward dividend-focused and value managers again but that changes every day. Growth managers now have a slight overweight in the Materials sector so if those stocks continue to underperform it will weigh on growth manager performance. Growth managers also have an overweight to Energy stocks, while value and dividend managers are underweight so the performance of those stocks will have a notable impact on relative style performance as well."

Active managers are optimistic that the favourable environment will continue. "In our recent discussions with investment managers in Canada," Wylie says, "they note that stock correlations and volatility are lower now compared to what was observed in many periods since the start of the financial crisis in 2008. They highlight that the market is more focused on the fundamentals of companies and less on macroeconomic issues. The fact that the situation in Cyprus did not send the market back into crisis mode is a good sign. If that had happened a year ago, it might have had a much larger, prolonged negative impact on the market. It's never going to be a smooth ride for active managers, but the environment is certainly more favourable."

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 approximately $163 billion in assets under management (as of 12/31/2012) and works with more than 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 $2.6 trillion in assets under advisement (as of 12/31/2012). 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 $3.9 trillion in assets are benchmarked to the Russell Indexes.

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SOURCE: Russell Investments Canada Limited

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