Although the second quarter of 2013 was challenging, with the S&P/TSX Composite Index falling by 4.1%, most large cap active investment managers in Canada added value and beat the benchmark, according to the Russell Canadian Active Manager Report.
In the second quarter, 96% of large cap managers outperformed the index, significantly more than 79% in the first quarter and the highest percentage on record.
The median large cap manager return was -1.5%, which was 2.6 percentage points higher than the benchmark S&P/TSX Composite Index’s return.
The performance of gold stocks had a significant impact on the investment manager performance in the second quarter with the S&P/TSX Global Gold Index plunging nearly 33%.
Read: Active managers top benchmark in Q1
“On average, large cap managers in Canada were nearly 4% underweight gold stocks at the start of the quarter, so the gold stocks’ extreme underperformance had a notable impact on benchmark-relative performance once again,” says Kathleen Wylie, head of Canadian equity research with Russell Investments Canada. “When gold stocks hit a peak of 14% of the index weight in 2011, investment managers were, on average, 6% underweight, so relative performance was even more sensitive to gold stock performance.”
After declining for three consecutive quarters, the weight of the gold sub-industry declined to 6% of the index by the end of the second quarter.
Although all styles of active management beat the benchmark, the median growth manager return of -1.1% was better than the median return of value- and dividend-focused managers, both at -1.5%. In terms of percentage of managers beating the benchmark, all growth and dividend managers beat the benchmark, followed by value managers with 94% ahead.
Although growth managers tend to have larger weights in gold stocks, which would have hurt their relative performance, they benefited from having a slight overweight in the top-performing healthcare sector compared to value- and dividend-focused managers that were underweight on average.
Dividend managers were hurt by their overweights to the utilities and telecom sectors, which underperformed along with the materials sector.
The S&P/TSX Composite Index has bounced back more than 4% so far in the first four weeks of the third quarter, but a strong rebound in gold stocks and less sector breadth may be making it challenging for large cap managers to beat the benchmark. Only three sectors are outperforming with materials among the top-performing sectors. On average, large cap managers are underweight materials, although their underweight position has declined in recent quarters.
In terms of style, it appears that either growth or value managers are leading. Growth managers have a smaller underweight to materials than value- or dividend-focused managers, so that may be helping their performance. With gold stocks rebounding, dividend- and value-focused managers are likely struggling since they have larger underweights than growth managers.
The report is produced quarterly and is based on recently released data from more than 150 Canadian institutional equity investment manager products.
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