The third quarter of 2011 turned out to be one of the roughest on record for active managers, according to the most recent Russell Active Manager Report, which is produced quarterly and is based on recently released data from over 140 money manager products. Only 40% of large cap Canadian equity investment managers beat the benchmark, down from 68% in the second quarter.
“Bottom-up stock fundamentals did not seem to matter in the quarter, as macro concerns such as the ongoing debt crisis in Europe dominated,” said Kathleen Wylie, senior research analyst at Russell Investments. “As well, we observed a significant spike in the correlations of stocks, and when that happens it is very challenging for active managers to add value. There were few places to hide, when 74% of the stocks in the index declined in the quarter. For many investment managers, benchmark-relative performance in the quarter was their worst on record.”
Wylie adds that the fourth quarter is off to a good start. “Many of the hardest hit stocks in the third quarter rebounded in October from the lows, and this is already translating into significantly stronger performance for many of those investment managers who struggled so much in the third quarter.”
Seventy-four percent of dividend-focused investment managers beat the S&P/TSX Composite in the third quarter, compared with 100% of dividend managers beating the benchmark in the second quarter. “The only two sectors to post positive returns in the third quarter were telecommunications and utilities, and dividend managers are overweight in both those sectors,” Wylie said.
The third quarter was hardest on growth managers, with only 12% able to beat the benchmark, down from 67% in the second quarter and the lowest on record. Value managers were slightly better with 30% beating the benchmark, down from 66% in the second quarter.
So far in the fourth quarter, performance looks like it might give an edge to growth managers, who are more favourably positioned in eight out of 10 sectors compared to value managers. Energy is among the top performers and the largest contributor to the S&P/TSX Composite return. Growth managers have a slight overweight to energy while value managers are underweight. As well, the stocks that have rebounded most in October tend to be more widely held by growth managers.