The first quarter of this year was not a good time to be a money manager, as less than 20% of large cap Canadian equity investment managers outperformed the benchmark—their worst showing since 1999.
According to the latest Russell Active Manager Report, the number of managers who were able to beat the benchmark is down from 41% in the fourth quarter of 2007, resulting in the median large cap manager’s return of -3.9% behind the S&P/TSX composite index return of -2.8%.
Kathleen Wylie, senior research analyst at Russell Investments Canada, says the results come down to two factors: sector performance and trading prices.
“Only two sectors had positive returns: materials and energy,” she says. “Equity managers in this survey tended to be underweight in both these sectors.” Gold stocks, in which most large cap Canadian equity investment managers are underweight, were up 8.4% and were the main driver for the materials sector. “Some managers don’t even own gold. From a sector perspective, that was the one thing that really hurt.”
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Trading prices did not accurately reflect the value of many companies, with poor quality companies reaping better rewards than high quality companies. Wylie says the situation is similar to 2003 when good value stocks were very expensive, leading to a heightened interest in companies of lesser quality, making life difficult for active managers. “It’s not that managers did anything wrong in the quarter,” she says. “It’s just a really tough environment.”
Growth managers are showing a negative trend, with 24% beating the benchmark in the quarter, down from 53% and 75% from the fourth and third quarters of 2007, respectively. And value managers outperformed growth managers in the quarter, with 27% beating the index after posting the worst back-to-back results since 1999, up from 16% and 9% in the fourth and third quarters of 2007, respectively.
Wylie says the underperformance of materials and the current resurgence of financials is evidence of good times ahead for value managers, but that they are not out of the woods yet. “What really is going to determine how well value managers do is whether financials come back.”
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