Russell Investments Canada Active Manager Report:
Surging commodities pose challenge for active managers in Q1 2016

  • Only 41% of Canadian large-cap managers beat the benchmark in Q1; lowest in two years
  • All investment styles in survey lagged the benchmark—except dividend managers
  • Early look at Q2: April continued to test active managers

TORONTO, May 5, 2016—Large-cap investment managers in Canada struggled to beat the benchmark in the first quarter of 2016 as only 41% accomplished that feat, down from 82% in the fourth quarter of 2015. The median manager return was 4%, just shy of the 4.5% return for the S&P/TSX Composite Index. These and other notable observations are included in Russell Investments Canada Limited’s (“Russell Investments Canada”) most recent active manager report, which is based on a quarterly survey of 148 Canadian institutional money manager products1.

“The strong market rebound at the end of the first quarter, particularly in the Energy sector and among gold stocks, made it difficult for most managers surveyed to beat the benchmark,” highlighted Kathleen Wylie, head of Canadian equity research at Russell Investments Canada. “Gold stocks surged a record 39% in the quarter, and even though large-cap managers are only 2% underweight, it still hurt their benchmark-relative performance because of the magnitude of the increase. Renewed strength in Energy stocks also added to the challenges since large-cap managers on average are about 3% underweight.”

Wylie noted that, while the quarterly report might tempt some to question the value-add of active management, Canadian active managers have more than proven their worth over longer-term horizons. On average over the past five calendar years through 2015, 71% of large-cap managers have beaten the benchmark, with the median large-cap active manager outperforming the S&P/TSX Composite Index by an average of 270 basis points.

Further, the firm’s data also show that the first quartile managers’ median return averaged nearly 580 basis points ahead of the S&P/TSX Composite Index return over the past five years through Dec. 31, 2015.

“Active managers may not beat the benchmark every single quarter,” Wylie said, “but the average value-add over the past five years for Canadian large-cap managers puts the first quarter’s challenges in perspective.”

Large-cap managers well positioned for the plunge in Valeant Pharmaceuticals

Valeant Pharmaceuticals, which dropped 76% for the first quarter, again ranked as the largest negative contributing stock in the S&P/TSX Composite Index. But, since Valeant was only held by 30% of large-cap managers in Canada at the start of the quarter, the stock’s decline was beneficial for the active management environment overall. In contrast, the second-largest negative contributing stock—Manulife Financial, which fell 10.4% for the quarter—was held by 69% of large-cap managers in Canada. As well, the top contributing stock in the quarter was Barrick Gold, up 72.5%, but it was only held by 14% of large-cap managers.

“Only five of 10 sectors beat the benchmark in the first quarter and on top of that, large-cap managers were only favourably positioned in four of the sectors,” said Wylie. “They were only overweight two of the five outperforming sectors (Utilities and Consumer Staples) and underweight two of the underperforming sectors (Financials and Health Care). Materials and Telecommunication led the other sectors, up 20% and 11.5%, respectively, and large-cap managers were underweight both on average.”

Wylie concluded, “Overall, it was a combination of sector positioning and stock selection that made it challenging for large-cap managers to beat the benchmark in the first quarter.”

Dividend managers rise to the top of the pack despite underweight to gold

Dividend managers were the only style to beat the benchmark during the first quarter with a median return of 5.5%, outperforming the Index return of 4.5%. In contrast, the median value manager (4.1%) and the median growth manager (2.6%) underperformed the Index. In the first quarter, 67% of dividend managers beat the benchmark, compared to 44% of value managers and only 17% of growth managers.

Wylie observed that dividend managers would have been hurt most by the surge in gold stocks since they have the largest underweight in those names, but that was more than offset by their positioning in the more defensive sectors such as Telecommunication, Utilities and Consumer Staples, which outperformed.

Performance within the Financials sector also presented challenges to managers with different investment styles. Although the Financials sector as a whole underperformed, diversified bank stocks were strong, up 5.4% for the quarter.

“On average, large-cap managers in Canada were underweight the banks heading into the quarter because they are such a large weight in the Index at 23%,” explained Wylie, “but dividend managers have the smallest underweight at less than 3% compared to 8% underweight on average for value managers and nearly 6% for growth.”

She added that Bank of Nova Scotia was the second-largest contributing stock to the Index, and it was held by 93% of dividend managers, compared to only 66% of growth and 75% of value managers at the start of the quarter. Overall, large-cap managers in Canada were 5% underweight the banks.

“After relatively strong performance through 2011 to 2013, dividend managers struggled during most of 2014 and into the first half of 2015, but now they’re back on top,” highlighted Wylie. “It just confirms that no single style outperforms all the time.”

Early look at Q2: April continued to challenge active managers

Although the S&P/TSX Composite Index rebounded in April, up 3.7% for the month, the active management environment is not looking favourable so far in the second quarter of 2016 with sector breadth more narrow. In April, only three of 10 sectors beat the benchmark, down from five of 10 in the first quarter. Large-cap managers appeared to only be favourably positioned in two of the 10 sectors. On average they are underweight the three outperforming sectors—Health Care, Materials and Energy—and have their biggest overweights on average to Consumer Discretionary and Information Technology, which underperformed in April. Benchmark-relative performance was hurt by strength in gold, up over 29% for the month. Valeant Pharmaceuticals rebounded in April, up more than 23%, but the weight is less than 70 basis points in the Index so its movements likely didn’t significantly impact manager performance relative to the benchmark.

“It’s not looking like a great start to the second quarter for active managers in terms of beating the benchmark,” Wylie summarized, “but the situation can change quickly. Early indications show a tilt back toward growth managers due to their more favourable positioning in the top three performing sectors. As well, defensive sectors underperformed in April after strong performance in the first quarter, so that will certainly work against dividend managers, who were in the lead in the first quarter.” 

1All data cited in the annual review is gross of fees as of March 31, 2016


About Russell Investments Canada Limited

Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments Canada Limited and its affiliates (including Frank Russell Company) are referred to collectively as "Russell Investments". Russell Investments was founded in 1936 and has its headquarters in Seattle, Washington. Russell Investments Canada Limited has its head office in Toronto.

About Russell Investments

Russell Investments, a global asset manager, is one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures to help each achieve their desired investment outcomes.

Russell Investments has more than CAD$319 billion in assets under management (as of 3/31/2016) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, the firm has US$2.2 trillion in assets under advisement (as of 6/30/2015). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than US$2 trillion in 2015 through its implementation services business.

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