2012 was a good year for investment managers focused on large cap, according to the Russell Investments Canadians Active Manager Report. The report indicates a median return of 9.4%, more than 2% above the S&P/TSX Composite Index’s return of 7.2%—the strongest benchmark-relative performance for these managers in a decade.
Using annual returns, 76% of large cap managers beat the benchmark in 2012 compared to 50% in 2011 and 41% in 2010.
“I’m sure it was a surprise how well managers did overall in 2012, but when you step back and look at each of the individual quarters, it was really only the third quarter where managers struggled to beat the benchmark,” says Kathleen Wylie, head, Canadian equity research at Russell Investments.
The key factor that impacts relative performance among investment managers tends to be how the energy and materials sectors perform, says Wylie. “Those two sectors accounted for 46% of the S&P/TSX Composite Index’s weight at the start of the fourth quarter, and large cap managers on average have their largest underweights to energy and materials. The performance of those sectors typically has a significant impact on whether managers outperform or underperform the benchmark.”
The energy and materials sectors underperformed the Index in the first, second and fourth quarters and for the year overall, so that helped managers beat the benchmark during those periods.
For the year, the median value manager return was 3.9% ahead of the benchmark, and the median dividend-focused return was 2.2% ahead. Growth managers lagged the Index for the second consecutive year. “On average, growth managers were overweight energy and only slightly underweight materials so that hurt their performance relative to value and dividend-focused managers,” explains Wylie.
Value and dividend-focused managers still in favour
During the first month of this year, the S&P/TSX Composite Index was up more than 2% with eight out of 10 sectors beating the benchmark. However, with the materials sector underperforming but energy and financials outperforming, the environment is mixed for investment managers who are underweight all three sectors.
In terms of style, dividend-focused managers have significantly larger underweights to materials, so the environment may be tilted back in favour of their style again, but value managers are also being rewarded. Once again, it appears that growth managers are lagging.
“The growth style of investing has not been rewarded for most of the period since the start of the financial crisis in 2008,” says Wylie. “But that will change eventually. No one style is in or out of favour all the time. It’s difficult to predict when that will change, so a multi-manager, multi-style, multi-asset approach is best when investing.”