Canadian large cap growth managers in Canada gained 11.1% in the fourth quarter of 2010, their highest return since the first quarter of 2009, according to new data from the Russell Active Manager Report.

That was well ahead of the S&P/TSX Composite Index’s return of 9.4% during the same period and ahead of the median value manager’s return of 9.1%. 

“The difference in performance between growth and value managers last quarter was also the largest since the second quarter of 2008,” says Kathleen Wylie, senior research analyst at Russell Investments Canada Ltd.

“Growth managers were more favourably positioned in nine out of 10 S&P/TSX sectors.  Energy and materials were the top-contributing sectors. Growth managers are slightly overweight energy and have less of an underweight in materials compared to value managers.”

In terms of stock selection, Canadian Natural Resources and Teck Resources were more widely held by growth managers and at larger weights compared to value managers. Canadian Natural Resources gained 25% and Teck Resources rose 47% in the fourth quarter of 2010.  Growth managers were also helped by owning less Encana and Bank of Montreal in the quarter, which were among the largest negative contributors to the Index return and were more widely held by value managers.

Overall, 52% of large cap managers in Canada were able to beat the benchmark in the fourth quarter of 2010, up notably from only 34% in the third quarter and 37% in the second quarter. 

“The 52% is in line with the 10-year average. However, it’s worth noting that without the underperformance of the dividend managers who struggled significantly in the quarter, the number would have jumped to 62% so we can conclude that it was generally a good quarter for active managers,” says Wylie.

The median large cap manager’s return was 9.6%, slightly ahead of the benchmark return of 9.4%.  The difference between the top-performing and the bottom-performing manager return was over 13%, the widest since the second quarter of 2009 but still below the historical average of 17%.

2011 starting on a positive note

2011 appears to be kicking off on a positive note for the S&P/TSX Composite Index with strong sector breadth and the materials sector lagging the benchmark. 

“Since large cap managers in Canada have their largest underweight to materials, any underperformance of those stocks will help them beat the benchmark,” says Wylie.   

The underperformance of gold stocks is also positive for large cap managers in terms of benchmark relative performance. In the early part of January, gold stocks fell 13% — which helps active managers, who are roughly 5% underweight the stocks on average. 

“Large cap managers have their largest overweights in consumer discretionary, industrials and information technology stocks so if the strength in those sectors continues, that should help large cap managers’ benchmark relative performance,” says Wylie.

“Early indications are that the value style of investing might be more rewarded in the first quarter of 2011 with value managers more favourably positioned in eight out of 10 sectors compared to growth managers based on sector performance so far in January.” 

Wylie thinks the performance of the top three most heavily weighted S&P/TSX Composite (energy, materials and financials) sectors will determine which style will be favoured since the positioning of those sectors is notably different for value and growth managers. 

“Value managers are underweight energy while growth managers have a slight overweight and growth managers are underweight financials while value managers are overweight. Value managers have a larger underweight to materials, particularly gold, compared to growth managers,” says Wylie.