- Originally from our sister publication, Advisor.ca.
A little volatility can be a good thing if you’re an active manager. Q2 saw 68% of active managers beat the index, according to the Russell Active Manager report. That’s a massive improvement from just 39% in Q1.
The bar was set pretty low, as the S&P/TSX Composite Index declined 5.2% in Q2, dragged lower by declines in the largest subsectors: energy, materials and financials.
“Large cap managers in Canada, on average, are now over 6% underweight materials companies and almost 2% underweight energy companies, so how those sectors perform relative to the index can have a notable impact on their benchmark-relative performance,” said Kathleen Wylie, senior research analyst at Russell Investments.
The relatively small telecom sector posted an 8.9% gain, helping active managers. BCE, held by nearly 60% of large cap managers, was the top contributor to outperformance.
“BCE is definitely most popular with dividend-focused investment managers, with 75% of them holding the stock at the start of the quarter at significant overweights, on average,” says Wylie.
Dividend-focused managers shone the brightest, as every single one of them beat the index.
The market as a whole took on a more defensive tone, as investors worried about sovereign debt problems on both sides of the Atlantic. Tighter monetary policy in China also stoked risk aversion.
Dividend managers were favourably positioned in nine out of 10 sectors with their nearly 5% overweight to telecommunications, 15% underweight to materials and 5% underweight to energy as the key contributors.
Sixty-seven percent of value managers beat the index, as did 66% of growth managers. But overall, the quarter smiled upon sectors favoured by value managers, suggesting that growth managers were better stock pickers within the sectors they focused on.
“Three stocks that would have helped growth manager performance were Equinox Minerals (up 42%), Magna International (up 13%) and First Quantum Minerals (up 13%), since those stocks are held by more growth managers than value managers and were all among the top 10 stocks contributing to the index return,” said Wylie.
“This was one of those quarters where the difference between growth and value managers was minimal, but there are quarters when there are extreme differences in performance that will persist for a few quarters, so it pays to have a multi-style portfolio to smooth out performance.”
While a little volatility helped in Q2, Wylie says the violent shifts experienced so far in Q3 present challenges to managers.
“The materials sector is among the outperformers, and active managers still have their largest underweight to that sector,” she said. “In terms of style, it is not clear which style is dominating. Value managers have significantly larger underweights to materials compared with growth managers, so that would hurt their relative performance. However, growth managers are overweight energy, which are underperforming. Sector positioning does not always determine relative performance; it comes down to stock selection. And it is our view that, in the long run, that is the key driver.”