Active management is not dead, judging by the results of the first three months of 2010. Three quarters of Canadian Large Cap active managers outperformed S&P/TSX, according to the Russell Active Manager Report, the highest level since the second quarter of 2004.
“The last two quarters have really highlighted the benefits of active management,” says Kathleen Wylie, senior research analyst at Russell Investments Canada. “Large cap managers in Canada have outperformed the S&P/TSX benchmark by 53 basis points on average per quarter over the last 10 years.”
In a stock picker’s market, the Canadian active managers continued to benefit, defying the odds in the face of the Greece-debt situation and looming interest rate hikes.
“The active managers we research expected 2010 to be more of a stock-picker’s market and that’s exactly what’s developed so far,” says Wylie. Although April proved to be a challenging month, the positive environment will continue through the rest of the year, she says.
“Only four sectors beat the benchmark and among the top-performers were energy and materials. Large cap managers have their largest underweights to energy and materials so strength in those sectors is hurting their benchmark relative performance,” says Wylie adding that anything can change with two months to go in the second quarter.
The outperformance, says the report, was up from the 57% of active managers that beat the S&P/TSX benchmark in the fourth quarter of 2009.
Wylie identifies the financial sector as a key contributor in the first quarter. The S&P/TSX Composite Index returned 3.1% but 80% of the return stemmed from the financials, she says.
“Good sector breadth allows stock selection to drive manager performance,” says Wylie. “Add to that an environment where correlations of stocks are lower and active managers with skill in research and portfolio construction have the opportunity to be rewarded.”
The report also found that 81% of value managers outperformed the S&P/TSX benchmark compared to 76% of growth managers.
The report says the superior performance of value managers was the result of tactical stock investment. When the gold sector declined by 6.5% in the first quarter, growth managers had 10% of their portfolios in gold stocks while value managers’ allocation was only 5%, which resulted in the latter performing stronger.
“Canadian equity investment managers have been busy repositioning their portfolios with value managers moving out of the financials sector and reducing their overweight in the last year, while growth managers have been moving into the financials sector and reducing their underweight positions,” says Wylie.
This was the fourth consecutive quarter that value managers outperformed growth, she says, adding that while there are periods when one style dominates the other, over the long run they tend to have similar returns.