Large cap managers in Canada posted their strongest benchmark-relative performance in 12 years in 2013, according to the latest Russell Investments Active Manager Report.
The median return for the year was an astounding 19.1%, more than six percentage points ahead of the S&P/TSX Composite Index’s return of 13.0%. Using annual returns, 94% of large cap managers beat the benchmark in 2013, compared with 76% in 2012. This was the highest percentage since Russell began to closely track the data in 2000.
“The strong environment for large cap managers in Canada was not a surprise last year because active managers beat the benchmark in every quarter,” says Kathleen Wylie, head of Canadian equity research at Russell Investments. “In fact, they have outperformed the benchmark for five consecutive quarters, which we have not experienced since 2001.”
Read: Active managers continue to top benchmark
What benefited managers for the year overall was positive sector breadth, with eight out of 10 sectors beating the benchmark—the most breadth since 2001. Investment managers were also helped by the decline in gold stocks in the year, she notes. Gold stocks fell 44% in 2013, and large cap managers in Canada were roughly 3.5% underweight gold stocks, on average, throughout the year.
“Gold stock performance has been a problem for active managers in the past, particularly in 2011, when their weight reached a peak of 14% and active managers were roughly 6% underweight the stocks,” explains Wylie. “Managers were significantly underweight gold stocks back then since they were such a large weight in the index, so when the stocks spiked, it would have a big negative impact on their benchmark-relative performance.”
All styles of large managers beat the benchmark for the year, but dividend managers led the way. They were helped by having the largest underweight to gold stocks. They also benefited from the strong performance of financial stocks last year since they have an overweight position.
The median dividend manager return for the year was 20.6%, more than 7% ahead of the S&P/TSX Composite Index’s return of 13.0%. Differences between value and growth managers for the year were nominal with growth managers 7.1% ahead of the benchmark and value managers 7.0% ahead.
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In the fourth quarter, dividend managers pulled ahead with 93% beating the benchmark and a median return of 8.9% compared with the benchmark return of 7.3%. That compares to 83% of growth and 81% of value managers beating the S&P/TSX Composite Index’s return. Dividend managers were helped in the quarter by being overweight financials and more underweight gold stocks compared to other investment styles.
More than halfway into the first quarter, it looks as if the environment has become challenging for large cap managers in Canada. Sector breadth is narrower, with only four sectors ahead of the benchmark, and the materials sector is among the top outperformers. Large cap managers are 3% underweight materials stocks, on average, so that is hurting their benchmark-relative performance.
Within materials, gold stocks are up roughly 26%, which is hurting large cap managers, who are 3% underweight, on average. Dividend managers are likely lagging the most since they have the largest underweight to gold stocks, which are outperforming and are overweight financials, which are underperforming.
Although the environment is not as favourable so far in 2014, active management has added value for three consecutive years in Canada after challenges in 2009 and 2010. “There will be periods where active management struggles,” Wylie explains, “but we continue to believe that investment managers who have disciplined processes and the skill to construct portfolios of fundamentally strong companies trading at reasonable valuations with solid management teams will add value in the long run.”