Q4 2024 Active Management Review: Strength in financials and tech

Executive summary:

• The financials sector performed strongly in global markets during Q4, largely due to a combination of monetary easing and dovish commentary from key central banks. Buoyed by AI opportunities, the tech sector also did well.
• The fourth quarter was a more favorable environment for active managers in Emerging Markets, International, U.S. Small Cap, Australia, Long/Short and Global Real Estate, while being more challenging for Global, U.S. Large Cap, Europe, the UK, Canada, Japan, and Listed Infrastructure managers.
• The Momentum factor performed well across most global markets outside of the U.S., while the Growth factor also outperformed in all markets besides Europe and Japan.

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During a rocky fourth quarter, strength in the financials sector was a unifying theme across global markets. The sector performed well on the back of monetary easing and more dovish rhetoric from central banks in key regions around the globe. Case-in-point: the U.S. Federal Reserve (Fed), the Bank of England (BoE), and the European Central Bank (ECB) all reduced policy rates during the quarter, while the Bank of Japan (BoJ) and Chinese authorities offered relatively more dovish commentary about future policy.

The tech sector also performed well across global markets, as investors continue to pursue AI-related tech plays. On the flip side, materials had a poor quarter globally, wrapping up a disastrous year for the sector.

The Momentum factor was a consistently strong performer across most global markets except in the U.S., where it underperformed slightly. Momentum closed the year with the best factor returns of any factor in the global equity market. Growth also saw a strong quarter globally, outperforming in all markets except Europe and Japan. In the U.S., Australia, and Canada, Growth was the top performer. Meanwhile, Low Volatility and High Dividend stocks were the best performers in emerging markets (EM), while the Value factor did well in Japan, Europe, and the UK. 

Overall, equity investors lacked enthusiasm during what proved to be a volatile quarter, with most global markets posting flat to negative returns by the end of December. Japan and Canada were the two exceptions, with each charting modest single-digit returns for the quarter. The U.S. election drove high levels of volatility across global equity markets, with investors uncertain about the impacts of potential changes in U.S. trade policy and tariffs. Equity managers were also concerned about the potential return of high inflation, tempering expectations for further interest rate cuts. 

Local currency returns for most markets were considerably better than U.S. dollar (USD)- denominated returns. The dollar continued to strengthen in the wake of President Donald Trump’s election victory, with markets speculating on the impact of potential U.S. tariffs on inflation and central-bank rate policy.

U.S. mega cap stocks dominated the U.S. and global developed indices. These included AI-related tech plays and U.S. consumer giants Amazon and Tesla. Positive sentiment toward the AI theme also supported strong tech stock returns in EM and Canadian equities.

On balance, the fourth quarter was a more favorable environment for active managers in Emerging Markets, International, U.S. Small Cap, Australia, Long/Short and Global Real Estate, while being more challenging for Global, U.S. Large Cap, Europe, the UK, Canada, Japan, and Listed Infrastructure managers. Sector dispersion remained wide across most markets, with narrow market leadership impeding managers’ relative returns.   

The U.S. election results caused significant volatility throughout the fourth quarter and are likely to remain a key driver going forward. Investors appear to be primarily concerned with U.S. trade policy, with the possibility of increasing tariffs and inflation impacting export-related sectors. These worries led materials to be among the worst performing sector in Global equities, Emerging Markets, Europe, Japan, and Australia. Other cyclical sectors also struggled across global markets. In addition to U.S. trade and tariff policy, geopolitical tensions also continue to be a key risk, causing uncertainty for investors and potential volatility in markets going forward.

At Russell Investments, our unique relationship with underlying managers affords us special access into the latest active management insights. Here are the key takeaways in fourth-quarter active management performance from our manager research team.

Global equities

The fourth quarter was a challenging environment for active Global equity and moderately positive for International strategies, with around 25% and 50% of products outperforming respective benchmarks.

• The quarter saw Large Cap Growth and Momentum reassert market dominance while Value and Small Caps struggled.

U.S. equities

The fourth quarter was a challenging environment for active Large Cap managers and moderately positive for Small Cap investors, with around 30% and 50% of products outperforming their respective benchmarks.

• Growth and Momentum outperformed in the quarter, continuing the trend from the first half of 2024.Value and Low Volatility underperformed in the risk-on rally.
• Higher growth sectors like technology and early cyclicals like financials were the best sectors as investors bet on rising growth. Energy and defensive sectors were underperformers.
• Market leadership narrowed during the quarter, as Q3’s winners again gave way to the Magnificent Seven and lower-quality names, which worked against the relative positioning of active managers.
  

Emerging Markets equities

The fourth quarter was a favorable environment for active Emerging Markets managers, with around 65% of products outperforming the EM index.

• The U.S. election outcome drove uncertainty and volatility in EM, with currency weakness being a key driver of negative returns.
• High Dividend, Momentum, and Minimum Volatility outperformed.
• Information technology (IT) continued to dominate and was the only sector with positive absolute returns. This resulted in a positive month for Taiwan.
• Brazil underperformed due to intensifying fiscal concerns, while South Korea saw a sharp pullback amid political instability and a presidential impeachment. Frontier markets performed well.

UK and European equities

The fourth quarter was a moderately challenging environment for active Europe and UK equity managers, with around 45% and 40% of products outperforming their respective benchmarks.

• Cyclically exposed areas of the market, such as real estate and materials, struggled on concerns over the economic slowdown in Europe and the UK.
• The UK outperformed continental Europe, helped by the performance of UK banks on expectations of higher-for-longer rates. UK stocks also benefitted from their more insulated position on potential U.S. tariffs, which negatively impacted European automakers in particular.

Japan equities

The fourth quarter was a moderately challenging environment for active Japan equity managers, with around 45% of products outperforming the Tokyo Stock Price Index (TOPIX).

• Value, Momentum and Large Cap outperformed, while Quality, Low Volatility, and Small Cap underperformed.
• The financials and consumer discretionary sectors rose, supported by a weaker yen. The persistent inflationary environment led to increased expectations for the normalization of Japan’s policy rates, boosting the performance of the financials sector.
• Conversely, the utilities sector underperformed due to Kansai Electric Power’s surprising announcement of equity financing.

Australian equities

The fourth quarter was a moderately positive environment for active Australian equity managers, with around 50% of products outperforming the ASX 300 Index.

• Banks continued their strong rally, returning 6.5% in the quarter and an average return of 33% over calendar 2024. The Commonwealth Bank of Australia (CBA) is now more than 10% of the ASX 300 Index, with a price-to-earnings (P/E) ratio of 25.6. Most active managers are underweight banks on valuation grounds, and it has been a significant detractor in 2024.
• Quantitative strategies again outperformed, where breadth in signals and holdings—combined with tighter benchmark-relative sector weights—contributed to positive results.

Canadian equities

The fourth quarter was a challenging environment for active Canadian Large Cap equity managers, with around 30% of the universe outperforming the S&P/TSX Index.

• Growth and Momentum outperformed while Low Volatility lagged.
• IT was the best performing sector in the quarter with constituents like Shopify driving the outperformance. Financials, particularly banks, and energy sectors were also ahead.
• Communication services was the worst performing sector as the largest telecommunications names continued to struggle due to high debt levels, increased price competition, and regulatory pressures.
• Despite the Bank of Canada (BoC) cutting interest rates by 50 bps in Q4, real estate struggled following a more hawkish outlook from the central bank, which tempered rate cut expectations for 2025.

Long/Short equity

The fourth quarter was a favorable period for long/short stock selection, with the HFRI Equity Hedge Index advancing 1.7%. The HFRI Equity Market Neutral Index outperformed slightly, advancing 2.1%. Both indexes significantly outpaced the MSCI World Index's -0.2% quarterly decline.

• The strong alpha performance was driven by a favorable stock selection environment across most major regions despite market volatility. Macro concerns around central bank policy, Middle East tensions, and U.S. election uncertainty drove the increased volatility.

Real estate and infrastructure

The fourth quarter was favorable for Global listed real estate managers, with 60% of active managers outperforming. It was an extremely challenging quarter for Global listed infrastructure, with only 10% of managers outperforming.

Real estate

• U.S. healthcare outperformed the benchmark, which was additive to excess returns for managers, driven by overweights in senior housing companies, Welltower and Ventas.
• Most managers are overweight the UK, where broad equity weakness and overweights to Big Yellow hurt excess returns.
• U.S. industrial was among the worst performing sectors. Most managers benefitted from underweights to the sector.

Infrastructure

• Holdings in communication infrastructure, which were down 19% and are not in the S&P Global Infrastructure Index, were a significant detractor for most strategies.
• Most managers are underweight energy midstream companies, which rallied due to expected improvement in business conditions under the Trump administration.