2010 to be an active manager’s market: poll

Russell Investments’ Active Manager Report suggests that active managers expect 2010 to be more of a stock-picker’s market, a trend that began in the fourth quarter of 2009.

“The expectation is that stock selection rather than sector positioning will have a larger impact on active manager performance in 2010, compared to 2009,” says Kathleen Wylie, senior research analyst at Russell Investments Canada. “The improvement in sector breadth that started in the fourth quarter of 2009 appears to be extending into 2010, which will certainly benefit the benchmark-relative performance of active managers. If correlations of stock returns are lower, this development will make it a better market for picking stocks. As a result, investment managers with skill in selecting stocks will be rewarded.”

Wylie points out that January started off very favourably for large cap Canadian equity investment managers, with eight out of 10 S&P/TSX Composite Index sectors ahead of the benchmark and only the Energy and Materials sectors lagging. Should this continue, she explains, the first quarter should be a very good on for active managers to beat the S&P/TSX benchmark since large cap managers have their largest underweights to Energy and Materials.

Value managers should also have a good quarter due to their sector positioning, she adds, as they have their largest overweights in Consumer Discretionary and Consumer Staples and their most significant underweights to resources, particularly Materials.

“For the month of January, value managers were more favourably positioned in nine out of 10 sectors, but we all know that the environment can change quickly and styles come in and out of favour. As a result, the best approach is a well-diversified portfolio of multi-managers with complementary styles so that investors can weather all types of environments.”

Riding the wave
Canadian large cap managers took advantage of the late-2009 rally, posting their largest returns in over three decades. However, large cap managers still lagged the S&P/TSX Composite Index by their widest margin since 1999, as the S&P/TSX benchmark returned 35.1%.

“Normally, we expect stock selection to be the main driver of excess returns for active managers,” Wylie says. “However, adding value from stock selection becomes more challenging for active managers when you have only three or four sectors outperforming and stock returns that were highly correlated.”

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