Active managers beat index in Q4

Active managers were back on top in the final quarter of 2011, as 76% of large cap managers outperformed the S&P/TSX Composite Index, according to the latest Russell Active Manager Report.

The median large cap manager return was 4.7% in Q4, compared to the 3.6% return of the index, making it the largest outperformance for active managers in three years.

It’s welcome news for active large-cap managers, as only 40% managed to beat the index in the extremely volatile third quarter.

“The focus came back to fundamentals, with many of the companies that were beat up in the third quarter rebounding strongly in the fourth, primarily in the month of October,” says Kathleen Wylie, senior research analyst at Russell Investments. “The market seemed to recognize that good companies, with good management, trading at reasonable valuations, should be rewarded.”

The best quarterly track record was posted by dividend-focused managers, as 94% beat the index. Seventy-five percent of value managers and 59 percent of growth managers also beat the market.

“Since many of the top-contributing stocks were held by managers of all styles, what differentiated their performance was the gold positioning,” says Wylie.

At the start of Q4, gold stocks made up almost 14% of the index weight and dividend-focused managers were 11% underweight and value managers were 9% underweight. Growth managers, on the other hand, increased their positions to a mere 1% underweight. When gold stocks underperformed, growth managers were caught holding too many miners.

Many of the top performing large cap stocks were also the most widely held, including Canadian Natural Resources, RBC, CN Rail and Suncor Energy.

“It was also a case of what managers didn’t own that helped them beat the benchmark in the fourth quarter,” says Wylie. “Gold stocks fell in the fourth quarter, and large cap managers on average were almost 6% underweight gold stocks at the start of the quarter. So the decline really benefited their benchmark relative performance.”

For the full year, 50% of active managers beat the index, Wylie says, with a median return of -8.3% compared to the benchmark’s -8.7%–or, more accurately, 42 basis points. It should be noted, she says, that top quartile large-cap managers beat the index by 400 basis points.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.