A version of this article originally appeared on our sister publication, Advisor.ca.
The favourable active management environment of 2012 has extended into 2013 with 79% of large cap Canadian equity investment managers beating the S&P/TSX Composite Index in the first quarter, notes the Russell Canadian Active Manager Report.
That compares to 81% in the fourth quarter of 2012, which was the highest in eight and a half years. The median large cap manager return was 4.7% in the first quarter of 2013 compared to the benchmark S&P/TSX Composite return of 3.3%.
“This sounds like a repeat of what we said a year ago at this time, but the environment was excellent for active managers in the first quarter of 2013,” says Kathleen Wylie, head, Canadian equity research at Russell Investments. “In fact, taking into account the fourth quarter of 2012, the back-to-back percentage of investment managers outperforming the benchmark was the highest since the middle of 2001.”
Read more:
The quarterly report notes good sector breadth during the first quarter was a key factor with eight out of 10 sectors outperforming the index. However, the underperformance of the materials sector, specifically gold stocks, benefited large cap managers.
Gold stocks fell 16% in the first quarter of 2013, following a decline of 13% in the fourth quarter of 2012.
“The performance of gold stocks has a notable impact on the quarter-to-quarter relative performance of investment managers in Canada because it is such a large weight in the benchmark,” says Wylie. “At the start of the first quarter, gold companies accounted for 10% of the S&P/TSX Composite Index, and large cap managers on average were 4% underweight. With the decline in gold stocks during the first quarter, the index weight of gold companies is now below 7%.”
Some of the most challenging quarters for active managers to beat the benchmark since the start of the financial crisis in 2008 were when gold stocks spiked, adds Wylie.
In terms of percentage of managers beating the benchmark, dividend-focused managers led the others, with 86% ahead compared to 85% of value managers and 75% of growth managers.
Value managers benefited from having large overweights to the information technology, consumer discretionary and consumer staples sectors, which all outperformed.
Dividend-focused managers were helped by their overweights to the industrials, telecommunication and financials sectors, which also outperformed.
Growth managers have been hurt by their underweights to financials and telecom but helped by their overweight to the energy sector, which outperformed in the quarter.
Although the market is struggling so far in the second quarter, with the S&P/TSX Composite down 4% led by materials, including gold, the environment looks favourable for active managers in terms of benchmark-relative performance. Sector breadth is very good with nine out of 10 sectors outperforming.
“It’s too early to call for sure,” says Wylie, “But based on sector performance so far in the second quarter, active managers are favourably positioned in six out of 10 sectors.”