Institutional investors prefer financials

By Steven Lamb | March 15, 2006 | Last updated on March 15, 2006
3 min read

(March 2006) Retail investors seeking insight on ‘where to invest next’ often look to the institutional side, reasoning that the largest money managers can afford superior research. While the energy sector may have been the obvious story in the recent past, institutional pooled equity funds continued to favour financial services stocks in the fourth quarter of 2005, according to Morningstar Canada.

Morningstar tracks more than 900 institutional pooled funds and releases data each month through its Principia for Pooled Funds desktop software.

The average Canadian Equity (Pure) pooled fund increased its allocation to financials to 32.3% in the fourth quarter, up from 20.6% in Q3. The average “regular” Canadian Equity pooled fund held 30.7% of its portfolio in financials, up from 29.5%.

This should come as little surprise, given the hefty weighting financial stocks have on the benchmark index, at 31.6% of the S&P/TSX Composite. Energy, the second largest sector on the TSX, also made up the second largest holding among Canadian pooled funds.

Canadian Equity (Pure) managers allowed their energy holdings to dip 0.4% to 24.2%, while the average Canadian Equity pooled fund held 27.4% in energy, up from 27.1% in Q3. Canadian Pure funds, on average, held about half as much cash as standard Canadian Equity funds, at 2.5% versus 4.9%.

There was little change in asset allocation among balanced funds, on average, in the fourth quarter. Cash positions in the average balanced fund remained unchanged, at 7.4%, while Canadian bond positions edged lower by 0.1% to 33.4%. Canadian equity positions slipped the most, down 0.5% to 32.6%, while foreign equity was trimmed 0.1% to 19.7%.

Reflecting the more diverse markets south of the border, financials made up a significantly smaller portion of U.S. equity pooled fund assets, but at 19.4% — up from 18% — they remain the largest sector allocation. Technology stocks made up the second largest sector, at 15.5%.

Among international equity funds, financials made up 23.3% of holdings, up from 21.4%, though short of the benchmark MSCI EAFE weighting of 27.8%. Cash positions dipped from 7% in the third quarter, to 6.1%.

Europe was the most favoured geographical region, at 39.1% of the average portfolio, down from 40.2%. Measured separately from the Continent, U.K. stocks fell to 18.7% from 19.8% of international portfolios. The average fund invested 19.2% in Japan.

International, Global and U.S. Equity indices rose 4.3%, 4% and 2.8%, while the Canadian (Pure) and Canadian Equity pooled fund indices lagged with gains of 2.5% and 2.4%. Both indices underperformed the TSX, which gained 2.9% in the final quarter.

Institutional managers who looked beyond the usual Canadian large cap stocks managed to shore up their returns, though, as the Real Estate index gained 4.7% and the Canadian Small Cap Equity index returned 4.5%.

Canadian fixed income pooled funds lagged their equity counterparts, with the Bond index turning in a gain of 0.9%, while the Mortgage index gained just 0.6% and Money Markets returned 0.7%. Again, looking abroad would have paid off, as the Foreign Bond index outperformed with a gain of 1.2%.

The average Canadian Bond pooled fund held 39.8% of its portfolio in federal government bonds, with corporate bonds making up 35.4% and duration averaged 6.7 years and 10.1 years respectively. The average cash position was 84%.

With mediocre domestic equity returns and a pretty flat showing in fixed income, Canadian Balanced pooled funds only managed to return 1.8%. On average, pooled funds in this group decreased their Canadian equity holdings to 32.6% by the end of the quarter, from 33.1% at the end of Q3.

On a full year basis, Morningstar found the Emerging Markets Equity index to be the top performer, with a gain of 27.8%. Despite the soft patch in the final quarter, Canadian Equity indices took the next three top rankings, as the Pure category gained 23.7%, Small Cap Equity earned 21.7% and the Equity index picked up 20.6%.

Filed by Steven Lamb,,


Steven Lamb