Active management was a better way to go in the second quarter (Q2) of 2015 for most institutional managers than tracking the broad Canadian benchmark index, according to the latest report by Toronto-based Russell Investments Canada Ltd.
According to the Russell Canadian Active Manager Report released on Thursday, 62% of large-capitalization active managers bettered the return of the S&P/TSX composite index compared with 53% of active managers in the first quarter.
However, most active managers were in negative territory as the median large-cap investment manager in Russell’s report returned -1.4% during Q2, better the benchmark’s index’s return of -1.6%.
Active management has been outperforming for some time, according to Kathleen Wylie, head of Canadian equity research at Russell. During the past five years, the median active manager outperformed the benchmark by more than 45 (bps) points on average per quarter, while managers in the top quartile averaged 165 points above the index. The Russell survey is based on about 155 institutional money manager products.
“Despite a negative return for the quarter, not losing as much as the index does help a manager’s long-term performance relative to the benchmark,” she says in a statement.
Large-cap managers were helped by overweighting their positions in outperforming sectors, including discretionary and consumer staples, and by underweighting their positions in the underperforming energy, materials and utilities sectors.
Within materials, gold stocks fell by 4% during Q2 and, on average, the large-cap managers were 2% underweighted in this sector relative to the benchmark.
Institutional managers also benefitted by holding the best performing bank stocks. Although they are underweighted in the banking group, overall, they are heavily invested in Bank of Nova Scotia, Toronto-Dominion Bank and Royal Bank of Canada.
However, many active managers missed out on the returns offered by the index’s top contributing stock to returns, Valeant Pharmaceuticals International Inc., which rose by 11% in Q2. The stock was held by only 35% of large-cap active managers surveyed.
Growth managers fared the best during Q2, with 75% beating the benchmark index compared with 58% of value managers and 50% of dividend-focused managers. Growth managers would have been helped by the strength in Valeant, but this advantage was offset by higher holdings in gold stocks compared with value and dividend-focused managers, who were underweighted in the sector by a larger percentage. Dividend managers tend to be the most underweighted in gold stocks, the Russell report says.
The Russell report also showed that small-cap managers were well ahead of large-cap managers, with a positive median return of 1.6% in Q2. However, a smaller group of 56% of small-cap managers beat their benchmark S&P/TSX small-cap index, which returned 1.3% during the quarter.
Although small-cap managers’ returns can be volatile, they have historically added value relative to their small-cap benchmark and to large-cap managers. During the past 10 years, the median small-cap manager’s return was ahead of the benchmark and the median large-cap manager by almost 160 bps and 65 bps, respectively, on average per quarter.