The global volatility that marked the first quarter of 2011 battered stock markets, allowing defensively positioned value managers to beat the S&P/TSX Composite Index, according to Russell Investments.
The Russell Active Manager Report found that 59% of large cap value managers beat the index’s 5.6% return for the quarter. Only 22% of growth-focused managers were able to beat the index.
In the first quarter of 2011, the median value manager earned a 6.3% return, compared to the 4.9% turned in by the median growth manager.
Targeting income also helped beat the index, with 55% of dividend-focused managers beating the TSX Composite.
Despite political unrest in the Middle East and natural disaster in Japan, gold stocks underperformed in the first quarter, according to Kathleen Wylie, senior research analyst at Russell Investments.
“The weakness in the materials sector, particularly gold, was the key contributor to value and dividend-focused manager outperformance. Value managers were roughly 7% underweight gold stocks and dividend managers were almost 9% underweight, so the 4.8% drop in the price of gold companies helped their performance,” she says.
“Conversely, growth managers on average were roughly 3% overweight [in] gold stocks and given that three of the five largest negative contributing stocks to the index return were gold companies that hurt their relative performance,” she added.
Wylie cites the case of Teck Resources to illustrate the point. Almost 80% of growth managers were holding the company in January, compared to less than 40% of value and dividend managers. By the end of the quarter, Teck was down 17%.
Meanwhile, value and dividend managers were more heavily concentrated in the financial sector, which rallied 9% in Q1 to beat the overall index.
Growth and value routinely trade the “best strategy” title, of course. In the third and fourth quarters of 2010, growth was the leader.
“There are certainly periods where one style will dominate but over long periods the two styles have had similar returns,” says Wylie. “It’s impossible to predict when one style will be in favour at any given time, so having a multi-style portfolio that includes more than one style of investment manager will help to smooth out the swings and lower volatility.”
Taking investment style out of the equation, she admits that it is difficult for large cap managers to routinely beat the index, due to the relatively small Canadian market. Only 39% of large cap managers were able to beat the TSX in Q1, compared to 52% in Q4 of 2010. The median large cap manager return was 5.3%, falling short of the benchmark by 30 basis points.
“The key is identifying those managers who are skilled in their selection of stocks and in how they construct their portfolios giving them the potential to outperform the benchmark and the median manager,” says Wylie. “In a typical market, these are the managers who have added significant value above the benchmark as proven by history.”
So far, the second quarter has been good for active managers, as the April decline of the TSX was concentrated in just two of the 10 sectors.
“Strength in consumer staples is positive for active managers who are overweight the sector. As well, the consumer discretionary sector is among the top-performers so far in the second quarter and large cap managers in Canada have their largest overweights in that sector,” Wylie says. “Overall, large cap managers are favourably positioned in six out of 10 sectors so that should be positive for their benchmark relative performance, although how they perform in the end will depend on their stock selection.”