Most active investment managers in Canada added more value in 2015
- 80% of large-cap managers researched by Russell Investments beat the S&P/TSX Composite Index
- Growth managers outperformed other investment styles for the first time since 2010
- Early look at 2016: Market volatility in January challenged active managers
TORONTO, February 11, 2016
Canada’s active equity fund managers proved their worth in 2015 as 80%1 of those surveyed beat the S&P/TSX Composite Index, which declined 8.3% for the year. That’s up from 2014 when 55% outperformed the Index. Following the pattern of 2014, the active management environment in 2015 improved as the year progressed with 82% outperforming the benchmark in the fourth quarter of 2015, up from 75% in the third, 62% in the second and 53% in the first quarter. These and other notable observations are included in Russell Investments Canada Limited’s most recent active manager report, which is based on a quarterly survey of 149 Canadian institutional money manager products2.
Data shows active large-cap managers continued to add value
“For many investors, 2015 proved to be a difficult year, and no one likes to lose money,” said Kathleen Wylie, Head of Canadian Equity Research at Russell Investments Canada. “But any time you outperform a broad market benchmark is important over the long run, unless of course your focus is absolute return. And assessing recent active management returns, it’s clear: The trend is your friend.”
According to the report, the median Canadian large-cap manager returned -4.8%, or roughly 350 basis points better than the S&P/TSX Composite Index. This accomplishment marked an improvement from 2014, when the median manager using annual returns was ahead of the Index by roughly 75 basis points.
“The past few years were extremely favourable for Canadian large-cap equity managers in terms of beating the S&P/TSX Composite Index,” added Wylie. “On a calendar year basis, the median large-cap active manager in Canada has beaten the Index for five consecutive years, outperforming by an average of 270 basis points per year. Further, the data shows that the first-quartile managers’ median return has averaged nearly 580 basis points above the benchmark each year over the past five years. These numbers show that investment managers with skill can add significant value to the portfolio, and that’s the focus of our manager research work at Russell Investments.”
Fourth-quarter 2015 active management environment: best in two years
The fourth quarter of 2015 marked the sixth consecutive quarter that large-cap managers beat the benchmark, and 82% accomplished that feat for the quarter. This marked the highest percentage since the fourth quarter of 2013, which ranked the quarter well above the five-year average of 63%.
“Opportune stock selection mainly helped explain why the fourth quarter was so favourable,” Wylie said.
She added that sector breadth was positive with six out of 10 sectors beating the benchmark, but that was down from seven out of 10 in the previous quarter. In addition, managers were favourably positioned in seven out of 10 sectors, with overweights on average to the outperforming Information Technology, Consumer Staples, Industrials and Utilities sectors. As well, they were underweight Energy, Telecommunications and Health Care, which were among the underperforming sectors.
A large Health Care stock in particular, Valeant Pharmaceuticals, plunged 41% in the fourth quarter, and since it was only held by 35% of large-cap managers at the start of the quarter, that lack of exposure helped their index-relative performance.
Meanwhile, diversified bank stocks outperformed with a return of 1.7% for the fourth quarter, but the most widely held bank stocks—Toronto-Dominion, Royal Bank of Canada and Bank of Nova Scotia—were mixed in terms of performance. Both Toronto-Dominion Bank and Royal Bank are held by 82% of large-cap managers, and those stocks rose 4.1% and 1.6%, respectively, in the fourth quarter. In contrast, Bank of Nova Scotia, which is held by 79% of large-cap managers, fell 2.5% in the fourth quarter.
Value managers owned the fourth quarter, but growth managers maintained their 2015 lead
Value managers staged a comeback in the fourth quarter of 2015, leading the other investment styles in the report for the first time since the third quarter of 2013. In the fourth quarter, 91% of value managers beat the Index compared to 81% of dividend-focused managers and 75% of growth managers. Energy positioning likely had the most notable impact on relative performance of value managers since they started the quarter with a 3.5% underweight in the Energy sector, which was one of the four sectors that underperformed during the period. Dividend managers were 3.1% underweight on average while growth managers were 2.7% underweight. As well, value managers had the largest underweight overall to the Health Care sector, which was the worst-performing sector. The relatively strong performance of the Industrials sector also helped value managers in the quarter, since they have a large overweight on average to the sector.
The value style of investing had been out of favour for most of the past two years after leading the way in 2012 and 2013. However, the outperformance of value managers in the fourth quarter of 2015 was not enough to propel them ahead of the other styles for the year as a whole. Growth managers led in 2015 as 92% of them beat the Index, based on annual returns; and the group’s median return was 625 basis points ahead of the benchmark. Dividend managers followed with 81% of them beating the benchmark, and the median outperformed by nearly 300 basis points. Value lagged the other styles as 67% beat the benchmark with a median return roughly 185 basis points ahead of the Index.
“Growth managers excelled in the first half of the year with the performance of Valeant Pharmaceuticals a key factor,” Wylie summarized. “The stock was up 67% in the first half before crashing 49% in the second half. Valeant’s roller-coaster performance took two-thirds of growth managers who held Valeant on a wild ride in 2015, while only a handful of dividend and value managers held that stock.”
Other stocks more widely held by growth managers that helped their benchmark- and peer-relative performance for 2015 were Alimentation Couche-Tard Inc, which was the top contributing stock, up 25.6%, Brookfield Asset Management, up 14%, CGI Group, up 25.1%, and CCL Industries, up 80%. In fact, of the 10 top contributing stocks in the Index for the year, seven were more widely held by growth managers. Not one was more widely held by value managers.
“The performance of the investment management styles in 2015 clearly demonstrates how styles come in and out of favour, making it difficult to predict which style will lead in the future. For that reason, we believe a diversified multi-style approach will help to weather the shifting fortunes of various investment styles and smooth the ride for investors,” highlights Wylie.
2016 not off to a great start for active managers
After significant volatility, the month of January ended with the S&P/TSX Composite Index down 1.2%. Sector breadth was less favourable than in the fourth quarter with only five of 10 sectors beating the benchmark, down from six out of 10 in the fourth quarter. Unfortunately, large-cap managers were only favourably positioned in four sectors with their modest overweight to Utilities a particularly positive position since it was the top-performing sector in January. They were also helped by their overweight to Consumer Staples, which outperformed, and their underweights to Materials and Health Care, which were among the underperforming sectors. Large-cap managers had their largest overweight positions in January to the Consumer Discretionary, Information Technology and Industrials sectors, and all three of those sectors underperformed in January. In addition, gold stocks, up 6.7% in January, didn’t assist large-cap managers who were roughly 2% underweight.
“Early in 2016, based on sector positioning, it looks like dividend managers could be ahead of their growth and value counterparts given that the defensive sectors of Utilities and Telecommunication were the top performing sectors for January,” said Wylie. “Valeant Pharmaceuticals in particular fell another 8.2% in January, and that definitely hindered growth managers the most.”
1Adjusting for investment managers who dropped out of Russell Investments’ universe in the past year results in a calculation of 73% beating the benchmark. Not all the managers who no longer provide data underperformed so the adjusted calculation is conservative.
2All data cited in the annual review is gross of fees as of Dec. 31, 2015.
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