2012 the best showing by active managers in a decade: report

“It was really only the third quarter where managers struggled to beat the benchmark,” explains Kathleen Wylie, head, Canadian equity research at Russell Investments.

The Russell report is produced quarterly and is based on recently released data from more than 140 Canadian institutional equity manager products.

The year started on a positive note when 66% of large cap managers beat the benchmark in the first quarter of 2012, and then improved in the second quarter when 69% beat the benchmark although the index declined so investment managers lost money.

“No one likes to lose money so the best situation for investment managers is when the S&P/TSX Composite Index increases and investment managers outperform,” says Wylie. “In the fourth quarter, the index rose 1.7% and 81% of large cap managers beat that benchmark, so that was the best of both worlds and ended the year on a positive note.”

The key factor that impacts relative performance among investment managers tends to be how the energy and materials sectors perform. “Those two sectors accounted for 46% of the S&P/TSX Composite Index’s weight at the start of the fourth quarter, and large cap managers on average have their largest underweights to Energy and Materials,” says Wylie.

Value and dividend-focused managers tend to have the largest underweights to energy and naterials so they benefited most from the underperformance of those two sectors. For the year, the median value manager return was 3.9% ahead of the benchmark, and the median dividend-focused return was 2.2% ahead. Growth managers lagged the index for the second consecutive year. “On average, growth managers were overweight energy and only slightly underweight materials so that hurt their performance relative to value and dividend-focused managers,” Wylie adds.

As noted, 81% of large cap managers beat the S&P/TSX Composite Index’s return in the fourth quarter — the highest since the second quarter of 2004. The median manager return was 3.2%, well ahead of the index return of 1.7%.

“Good sector breadth, with seven out of 10 sectors outperforming, combined with the underperformance of 4nergy and materials, including gold, helped active managers close the year on a high,” says Wylie. “All styles outperformed in the quarter, including growth, but value managers came out on top.”

During the first month of 2013, the S&P/TSX Composite Index is up more than 2% and sector breadth is positive with eight out of 10 sectors beating the benchmark. However, with the materials sector, including gold, underperforming but energy and financials outperforming, the environment is mixed for investment managers who are underweight all three sectors.

In terms of style, dividend-focused managers have significantly larger underweights to materials, so the environment may be tilted back in favour of their style again, but value managers are also being rewarded. Once again, it appears that growth managers are lagging.

“The growth style of investing has not been rewarded for most of the period since the start of the financial crisis in 2008,” explains Wylie, “but that will change eventually. No one style is in or out of favour all the time. It’s difficult to predict when that will change, so a multi-manager, multi-style, multi-asset approach is best when investing.”