The active management environment continued to improve in the third quarter with more than half of large cap managers beating the S&P/TSX Composite Index, up from only 41% in the second quarter, according to most recent Russell Investments Canada Limited (Russell Canada) Active Manager Report

The median return was -0.5%, slightly better than the S&P/TSX Composite Index return of -0.6%.

“The third quarter was a favourable active management environment for large cap managers after they struggled in the first half of the year,” highlights Kathleen Wylie, head of Canadian equity research at Russell Canada. “Despite the stock market decline in the quarter, more than 50% of large cap managers beat the benchmark, which we view as a favourable quarter for active managers overall.”

She noted that just over a third of large cap managers actually posted positive returns in the quarter, with the range in returns from the top- to bottom-performing managers fairly wide.

Wylie highlighted that, over the last 10 years, an average of 54% of large cap managers have beaten the S&P/TSX Composite Index per quarter. That number increases to 59% in the last five years.

Sector breadth was significantly better in the third quarter with seven of 10 sectors beating the benchmark compared to only two out of 10 in the second quarter.

Materials, energy and telecommunications were the three underperforming sectors, which helped large cap managers who are underweight each on average. Large cap managers were overweight four of the sectors that outperformed and underweight the three that underperformed so they were favourably positioned in seven of the 10 sectors.

Of the top 10 stocks contributing to S&P/TSX Composite Index performance, only two were widely held by large cap managers. The top contributing stock, Canadian National Railway, up 14.9% in the third quarter, was held by 68% of large cap managers. The second top contributing stock, Royal Bank, rose 5.9% in the quarter and was held by 81% of large cap managers. Other top contributing names such as Canadian Pacific Railway, Valeant Pharmaceuticals, Tim Hortons Inc., and National Bank were held by less than 40% of large cap managers.

Also hurting benchmark-relative performance were the two largest negative contributing stocks, Suncor and Canadian Natural Resources Ltd. Suncor fell 10.4% in the third quarter and was held by 72% of large cap managers. Canadian Natural Resources fell 10.8% and was held by 77% of large managers. “Of the 10 largest negative contributing stocks, six were widely held by large cap managers,” according to Wylie.

Dividend-focused managers fared better than growth or value managers in the third quarter with 61% beating the benchmark compared to 58% of growth and 48% of value managers. The median dividend-focused manager return was -0.1% compared to -0.4% for growth and -0.6% for value managers. The biggest range in returns was in the growth universe where the top manager returned 4.0% and the bottom manager returned -11.4%.

Dividend managers benefited most from the 16.5% decline in gold stocks since they started the third quarter with the largest underweight of 4.2%, compared to value managers who were 3.4% underweight, and growth managers who were 1.8% underweight golds on average.