Active managers beat benchmark in tough Q2

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, according to the Russell Canadian Active Manager Report.

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

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.

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The median large cap manager return was -1.5%, which was 2.6% ahead of the benchmark S&P/TSX Composite Index’s return.

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.

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 Kathleen Wylie, head of Canadian Equity Research at Russell Investments Canada Limited. “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.

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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.

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 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.

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.

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