For the fourth consecutive quarter, the majority of large cap investment managers in Canada added value and beat the benchmark, according to Russell Investments.
In the third quarter of 2013, 74% of large cap managers outperformed the S&P/TSX Composite Index, following a record 96% in the second quarter. In the third quarter, the median large cap manager return was 7%, compared to the index’s return of 6.2%.
“In the most recent four quarters, an average of 83% of large cap managers beat the benchmark with the median manager return ahead of the benchmark by roughly 150 basis points on average,” says Kathleen Wylie, head of Canadian equity research at Russell Investments Canada. “That’s significantly stronger than in 2007 when an average of 57% of large cap managers beat the benchmark in four consecutive quarters by an average of 30 basis points.”
In the third quarter of 2013, there was less sector breadth than in the previous quarter, with only four out of 10 sectors beating the benchmark, down from seven out of 10 in the second quarter.
Read: More active managers beat benchmark
Large cap investment managers in Canada on average are underweight the energy sector, which outperformed the benchmark and was the second highest contributor in the third quarter. Highlighting the importance of stock selection in the quarter was Suncor Energy, which was up nearly 20%, and the top-contributing stock in the index. It was held by 74% of large-cap managers at an average overweight of more than 1%, so that helped their benchmark-relative performance.
Investment managers in Canada are also underweight the financials sector on average, which was the third top-performing sector. But within financials, managers were heavily weighted to bank stocks. Toronto-Dominion Bank was the second top-contributing stock in the index, up 11% and held by 88% of large cap managers. Royal Bank of Canada was the third top contributor, up 9% in the quarter and held by 81% of large cap managers.
Bank of Montreal, also a top contributor, is less widely held but was still owned by more than half the large cap managers at the start of the quarter. “Of the top 10 contributing stocks, five were banks,” she says, “and all of them were held by the majority of investment managers.”
After declining for three consecutive quarters, gold stocks were strong in the quarter, up 8%.
Investment manager performance was also helped by what they did not own in the quarter. BlackBerry (formerly Research In Motion) fell 27% in the third quarter but was only held by 31% of large cap managers. Cameco was also a negative contributor, falling 14% but only held by 34% of large cap managers.
PotashCorp did not help active managers since it was the largest negative contributor and was held by 67% of large cap investment managers.
In the third quarter, 76% of value managers beat the benchmark compared to 75% of growth and 55% of dividend-focused managers.
Read: Active managers top benchmark in Q1
By style, performance appears to be mixed so far in the fourth quarter. Value managers may be leading the way again compared to growth managers, with their overweights to consumer staples and consumer discretionary and their underweights to energy and materials helping.
Growth managers are likely being hurt by their 2% overweight to the energy sector, which is underperforming so far in the fourth quarter. Dividend managers are likely being helped by the underperformance of energy and materials and the outperformance of financials and utilities. They have their largest overweight in telecommunications so how that sector ends up performing will impact performance.
“Right now things are changing day-to-day so it’s difficult to get a clear picture but we are generally in a favourable active management environment,” adds Wylie. “I know that during the financial crisis, investors began to question the value of active management but the improvement highlights that over the long run it does add value.”
A version of this story originally appeared on our sister publication, Advisor.ca.