Forty-one percent of large-cap managers beat the S&P/TSX Composite Index in Q2, a 10% increase from the first quarter, according to a Russell Investments report.
The median manager return was 6.2%, slightly behind the S&P/TSX Composite Index return of 6.4%. The report’s based on a quarterly survey of roughly 150 institutional money manager products (all data cited is gross of fees).
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Over the last 10 years an average of 54% of large cap managers have beat the S&P/TSX Composite Index per quarter, notes Kathleen Wylie, head of Canadian Equity Research at Russell Investments. That number increases to 58% in the last five years.
In Q2, only two of 10 sectors outperformed the benchmark, but large cap managers were favourably over- or underweighted in six of the 10.
The only two outperforming sectors were Energy and Industrials. Large-cap managers were almost 2% overweight Industrials on average, which helped their benchmark-relative performance. Within Industrials, railroad stocks were key contributors but manager positioning at the start of the quarter was mixed. Canadian National Railway, up 12.2% during the quarter, was owned by 70% of large cap managers. Canadian Pacific Railway, up 16.9% in the quarter, was only owned by just 32% of large cap managers.
Large-cap managers were underweight Energy slightly more than 2%, which would have hurt their benchmark-relative performance. However, if the pipeline stocks, specifically Enbridge Inc. and TransCanada Corp, are excluded from the Energy sector, large-cap managers on average would be overweight Energy. Each stock has a large weight in the sector, yet was owned by less than half of the managers surveyed.
Enbridge has a 2.4% weight in the index and is only owned by 41% of large-cap managers, while TransCanada has a 2.0% weight and is owned by 49% of large cap managers. Both stocks underperformed in the quarter.
The largest sector in the index is now Financials, which started the second quarter at a 34% weight. Overall positioning of the Financials sector helped large-cap managers in the quarter since they are over 2% underweight on average and the sector underperformed. “However, within Financials, diversified bank stock performance was strong at 7.2% and large-cap managers tend to be overweight,” notes Wylie.
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“In fact, the most widely held stock by large-cap investment managers in Canada at the start of the second quarter was TD Bank, held by 89% and among the top contributing stocks in the quarter with a return of 6.9%.” Bank of Nova Scotia, held by 88%, was the second top contributing stock, up 12.1% in the quarter. Overall, large cap managers in Canada were 3.4% overweight diversified banks at the start of quarter.”
Growth managers fared better than defensive managers in the second quarter, with 50% beating the benchmark compared to 34% of value managers and 27% of dividend-focused managers. The median growth manager return was in line with the benchmark return of 6.4% but the more defensive value and dividend-focused manager medians lagged the benchmark, with 6% and 5.6% returns, respectively. Growth managers benefited from a large underweight on average to the underperforming Telecommunication and Utilities sectors.
Gold stock performance also helps explain differences in investment manager style performance during the quarter. Gold stocks were up almost 10% in the quarter, which hurt value and dividend manager performance most since they have larger underweights. On average, value and dividend managers were underweight gold stocks by 3% and 4%, respectively, while growth managers were less than 2% underweight at the start of the quarter.
In the first four weeks of Q3 sector breadth has improved with four of the 10 sectors outperforming, up from only two in the second quarter. However, active managers are favourably positioned in six out of 10 sectors, the same as in the second quarter. Overweights to Industrials and Consumer Staples are helping benchmark-relative performance for active managers since those sectors are the top performing sectors. Strong performance in diversified bank stocks is continuing, which is also benefiting large cap managers. Gold stocks are underperforming slightly, which is also positive for large cap managers.
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