After a strong year for active managers in 2013, only 31% of large cap managers were able to beat the S&P/TSX Composite Index in the first quarter of 2014, down from 86% in the previous quarter.
The Russell Investments Active Manager Report finds that the median manager return in the quarter was 5.5%, behind the index’s return of 6.1%.
“We saw the trend reverse this quarter after seeing a string of five consecutive quarters of favourable active management environments and a 2013 that was overall the best year for active managers since 2001,” notes Kathleen Wylie, head of Canadian equity research at Russell Investments.
During the first quarter, five of 10 sectors beat the benchmark, but investment managers were only favourably positioned in four. The top three performing sectors in Canada were healthcare, materials and energy; Canadian large cap managers were underweight in all three at the start of the quarter.
Large cap managers had their largest overweight to consumer discretionary, information technology and industrials, three underperforming sectors.
Value managers fared slightly better than growth and dividend managers in the first quarter, with 33% beating the benchmark. That compares to only 25% of growth and 15% of dividend managers beating the benchmark.
The median value manager return was 5.5%, just slightly ahead of the median growth manager return of 5.4%. The median dividend manager return was 4.3%. Dividend managers struggled the most due in part to their overweight to telecom stocks, which underperformed. They also have the biggest underweight to gold stocks at nearly 4% compared to 1.5% for growth and 2% for value managers. And they have a larger weight in financials compared to the other styles.
“It is interesting to note that dividend managers on average have moved to an underweight position in financials. Part of that stems from the fact that the financials sector has now grown to over 35% of the Index,” says Wylie. “The Canadian market has a tendency to go from one concentration issue to another, which can present challenges for investment managers.”
Nortel was the concentration issue in 2000, then resources grew to over 50% of the Index weight in 2008, then gold stocks peaked at 14% in 2011.
Although it is still early, the environment for active managers appears to be more favourable so far in the second quarter.
Sector breadth is worse, with only three of 10 sectors ahead of the benchmark, but large cap managers are favourably positioned in six of them. Although energy is the top-performing sector and large cap managers on average are underweight, they are benefiting from their overweight to information technology and industrials which are both outperforming.
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