Originally from our sister publication, Advisor.ca.
The first quarter of 2012 was a good one for active managers in the large cap Canadian equity space, as two-thirds beat the S&P/TSX Composite Index, according to the Russell Active Manager Report. That’s actually a decline from the final quarter of 2011, though, when a 76% beat the index.
The median return among large cap managers was 5.3% beating the benchmark by 0.9%. On average over the last 10 years, 52% of large cap managers have beaten the benchmark.
“Taking the fourth quarter into account, the back-to-back percentage of managers beating the benchmark was the highest since 2004,” says Kathleen Wylie, senior research analyst at Russell Investments. “Fundamentals mattered in the quarter with the market focused more on company specifics and less on the macro environment.”
Active managers with a large overweight position in consumer discretionary stocks benefited from the 14% gain in that sector, while underweighting the massive energy and materials sectors also helped boost returns versus the index.
While the overall energy sector was in decline, security selection within the group found some winners. Among the top ten contributors to the S&P/TSX Composite Index’s return, Pacific Rubiales Energy and Suncor were the only two from the oilpatch.
“Suncor was an interesting name, with the stock up 11% in the first quarter and 75% of large cap managers holding it,” says Wylie. “The stock struggled in 2011 when it was down 22% so it was quite a turnaround in the first quarter.”
An overweighting to specific bank stocks was also key to beating the index. TD Bank was the most widely held stock among active managers at the beginning of the quarter, with an average overweight of almost 1%. That stock gained 12% in the first three months, while RBC gained 12% and Scotiabank rose 11%. Both were widely held among active managers.
Management style also contributed to returns, with 90% of value managers beating the benchmark, versus only 41% of growth managers. The spread was closer in Q4, but still favoured value, with 75% beating the index, compared to 59% of growth managers.
“It’s not unusual at all to have quarters like this where there are notable differences in performance between value and growth managers,” says Wylie. “In the long run, those styles tend to perform similarly but on a quarter-to-quarter basis, differences can be significant, which is why we recommend a multi-style, multi-manager approach to investing.”
One of the reasons was evident in the lagging gold sector, which declined 4.3% in the first quarter. Value managers averaged a 7% underweighting to precious metals, while growth managers were, on average, only 2% underweighted.
Value managers tended to have larger overweight positions in Consumer Discretionary, Information Technology and Consumer Staples sectors than growth managers, and larger underweightings in Materials and Energy.
“It always comes down to stock selection, which we believe is the key driver of added value in the long run,” says Wylie. “It’s early in the quarter yet and the situation changes day-to-day but it looks like Dividend-focused managers are being rewarded the most so far as they’re favourably positioned in seven out of 10 sectors.”
The Active Manager Report is produced quarterly and is based on recently released data from more than 140 Canadian equity money manager products.