(May 5) – “The inability of pension fund and mutual fund managers to wrestle with the Canadian stock market’s 8,000-pound gorilla has made it tougher for them to ape or beat the Toronto Stock Exchange 300 composite index, the domestic benchmark,” writes William Hanley in today’s Financial Post.

“But all the blame for managers’ underperformance can’t be pinned on the King Kong-like weighting of Nortel Networks Corp. in the TSE 300.”

In a column entitled, “Tougher to ape the market,” Hanley notes that William M. Mercer Ltd.’s Canadian Pooled Fund Universe first-quarter performance statistics show that the median manager return for a Canadian equity fund once again failed to match the TSE 300 — 9.5% versus 12.8%.

“Over the year to March 31, the outperformance of the TSE 300 was even more striking — 45.5% against 35.7%. Only 25% of the managers in the Mercer Universe beat the TSE 300 over the two periods.

“With the weighting of Nortel in the TSE 300 now at a whopping 27.4% and the benchmark presumably even more difficult to ape, the managers are ready to embrace a TSE 300 with Nortel or any other gorilla that happens to come along capped at 10%.

“‘Our recent survey indicated that an overwhelming majority within the investment management industry wants a capped index,’ said Mercer’s Barry McInerney, adding that the capped TSE 300 announced last week by Standard & Poor’s Corp. should meet this need.

“‘However, we should be careful not to blame the managers’ entire underperformance [on] the Nortel effect,’ McInerney said, because a capped TSE 300 (no more than 10% exposure to one stock) underperformed the non-capped TSE 300 for the three and 12 months ended March 31 by only 1.4% and 4%, respectively.

“‘Investors should peer into their managers’ underperformance beyond Nortel,’ he concluded.”