The last year hasn’t been kind to active managers — they haven’t beaten their benchmark in four quarters, but according to a new survey, they’re getting closer.
Russell Investments Canada’s active manager report reveals that in Q2 of this year, 41% of active managers outperformed the benchmark. That’s an improvement of 21 percentage points over the first quarter’s numbers.
Kathleen Wylie, a senior research analyst at Russell, chalks up the managers’ better performance to falling gold stocks. “Compared to the first quarter, gold was not a factor,” she says.
In the first quarter, gold stocks were up 17%, but they were down 2.5% in Q2. Wylie explains that institutional active managers tend to underweight gold and most don’t hold gold stocks, so their results were better.
But, compared to how well active managers have done in years past — between 1999 and Q2 2007, 56% beat the benchmark — their second-quarter finish is still low. The mediocre performance can be attributed to the success of the energy and materials sectors, which most active managers have underweighted.
“Energy and materials were the only two sectors that beat the benchmark,” says Wylie. “So we had a very narrow market.”
On average, large-cap managers are underweight in energy by 1.9% and materials by 3.1%. With the best-performing stocks belonging in those two sectors, there was almost no chance for active managers to beat the index this quarter.
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That doesn’t mean all managers are hanging their heads; 81% of growth managers outperformed the benchmark, compared to a dismal 12% of value managers.
Again, the reason why growth did so well has to do with their weighting in energy, which tends to be higher than that of value managers. “We’ve seen growth managers moving into the energy sector,” says Wylie. “At the start of last year they were about 5% underweight and now they’re neutral. That’s helped a lot.”
However, the same reason they did well in Q2 could drag growth managers down in the next quarter, as energy stock prices have fallen.
Value managers did especially poorly in the second quarter because they’re overweight in financials, which was the third-worst performing sector in Q2.
Looking forward to Q3 results, value managers are poised for some gains, as financials have already improved significantly.
In fact, if financials hold up, all active managers will fare better — and maybe even beat the benchmark for the first time since Q2 2007. “The environment looks more favourable in the third quarter,” she says. “Value managers have done really well in July, thanks to financials. If this continues, it’s going to be a fantastic quarter.”
She does add one caveat to her prediction though: “As we know, things can change very quickly.”
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(07/30/08)