Russell Investments Active Manager Review – Q1 2018: Active managers fare well in Q1, add to defensive positions
- More than half beat their respective benchmarks for the quarter
- Non-U.S. equities led active performance increase from Q4 2017
- More managers considering consumer staples amid market volatility
LONDON, 9 May 2018 – Global asset manager Russell Investments today released findings from its quarterly assessment of active manager performance, based on a review of 1,200 institutional money manager products monitored by the firm’s global equity manager research team.
The environment for active equity managers was generally favourable across regions in the first quarter of 2018, as more than half of the products assessed beat their respective benchmarks. European and Canadian equity managers fared particularly well: more than 75% of actively managed European equity products outperformed their benchmarks and similarly, about 75% of Canadian actively managed products outperformed.
After a quarter dominated by increased market volatility, equity managers remain generally positive on the market overall, with some taking advantage of downturns to add high-quality stocks at more reasonable valuations.
“Investment managers are more cautious and adding to more defensive positions, compared to a year ago,” said Albert Lim, senior research analyst at Russell Investments. “More managers are considering consumer staples given the sector’s defensive characteristics and reasonable valuations, particularly following a few years of lagging returns relative to other sectors.”
Even so, growth stocks outperformed value across most regions during the first quarter. “This turned around a bit in the first two weeks of April, but many managers expect moderate earnings growth, which would typically benefit growth stocks going forward,” Lim said.
Russell Investments’ equity manager research team also observed the following in its quarterly assessment by region:
U.S. large cap equities
50% of active U.S. large-cap products outperformed the Russell 1000® Index.
- With the U.S. large-cap market appearing expensive after eight years of strong market returns, U.S. large-cap active managers have become slightly more defensive relative to their 2017 positioning, though remain pro-cyclically positioned overall. This has led to a rotation into consumer staples and telecom stocks, which are traditionally more defensively-oriented.
- While the consumer staples sector has underperformed all other sectors for the past year — declining 4% through to 31 March 3 2018 — many managers now see opportunity in consumer staples due to more reasonable valuations and potential downside protection.
U.S. small cap equities
45% of active U.S. small-cap products outperformed the Russell 2000® Index.
- Active managers benefitted from the underperformance of REITs and utilities, which small-cap managers generally underweight, and the outperformance of technology stocks, which small-cap managers generally overweight. Conversely, their general underweight to health care, particularly biotech stocks, negatively impacted results.
- Active small-cap managers are generally positioned for later stages of the economic cycle. This has led to being overweight to growth, quality and momentum factors while being underweight to more cyclically-oriented stocks.
Global / international equities
60% of active global products outperformed the MSCI All-Country World Index, while about 80% of international equity products outperformed the MSCI World ex-U.S. Index.
- Dynamic stocks outperformed their defensive counterparts for the quarter, benefitting active managers, who on average are underweight low-volatility stocks.
- Emerging markets (EM) outperformed developed markets for the quarter, which was a tailwind for global/international managers given their general overweight to EM.
- Technology was the best-performing sector for the quarter, benefitting growth managers; while consumer staples was the worst-performing global sector and energy was the worst-performing global-ex U.S. sector, hurting managers with more defensive positioning.
- Value managers struggled to find opportunities because of uniformly high valuations, but they are beginning to find relative value in consumer staples.
UK and European equities
75% of active European products outperformed the MSCI Europe Index, while about 80% of active UK products outperformed the MSCI UK Index.
- Performance differentials across investment styles were mixed and relatively muted, but differentials across capitalisation tiers were meaningful with mid- and small-cap stocks outperforming.
- European managers are cautious in general, but are finding more opportunities in Continental Europe than the UK.
Emerging markets equities
65% of active EM equity products outperformed the MSCI Emerging Markets Index.
- Overweight positions to value and momentum stocks benefitted active EM managers. They also added value through overweight positions to Brazil and Russia; underweights to India; and overweight positions to energy, health care and financial services. However, overweight positions to consumer staples detracted.
- The average EM manager has been overweight to Russia on expectations for economic recovery, but managers seem concerned as the second quarter begins about higher risk premiums due to sanctions and geopolitics.
50% of active Japanese equity products outperformed the Tokyo Price Index (TOPIX).
- Growth managers fared much better on a benchmark-relative basis than their value counterparts.
- While the dispersion between value and growth investment factors has widened, there were few managers who made significant portfolio shifts given concerns around the sustainability of global economic growth, yen appreciation and political risks.
65% of active Australian equity products outperformed the S&P/ASX 300 Index.
- With Australian growth stocks outperforming their value counterparts, growth and market-oriented managers outperformed the benchmark as value managers struggled. Much of this style differential was driven by the underperformance of bank stocks. Further, managers with a bias toward quality investment factors performed relatively well as those stocks outperformed.
- Active managers benefitted by decreasing exposure to banks and adding to energy, transportation and consumer staples during the quarter.
75% of active large-cap Canadian equity products outperformed the S&P/TSX Composite Index.
- Canadian growth managers outperformed their value counterparts for the quarter due to their over-weight position to technology, which was the only sector to post positive absolute returns. Most active managers were well-served by their bias for quality, as it was the best performing factor for the quarter. Meanwhile, income-oriented managers fared worst as increased trade tensions and rising interest rates caused high dividend yield stocks to lag the broad market.
- Active managers were favourably positioned in most sectors, particularly those with a meaningful overweight position to technology and/or an underweight to interest-sensitive sectors such as utilities and telecom, which were among the top contributors to the benchmark.
An industry authority on investment manager research, Russell Investments has been researching and hiring the world’s leading money managers for assignments in the firm’s investment portfolios for more than 45 years. Learn more about the firm’s manager research capabilities.
Note: Percentages cited in this review are rounded to the nearest 5%, as of 31 March 2018, because data from a small percentage of third-party investment managers in the firm’s universe are not available as of this cut-off date. In previous quarters the subsequent addition of these later-reporting products has not materially changed our research analysts’ preliminary assessment. In addition, all percentages cited for specific regions are assessed using the local currency. Any observations included in this assessment are based on a sampling of available information as of the cut-off date.
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