Index beat most active managers in Q2

(August 2, 2005) Active managers had a tough time keeping up with the Canadian benchmark index in the second quarter, as the burgeoning energy sector drove the S&P/TSX Composite to a return of 3.6%, according to the latest Russell Canadian Active Manager Report.

Less than half of active equity managers (43%) were able to top the index, with the median large cap manager posting a gain of 3.2% in the quarter. Energy led the overall index, as the price of crude crested $60 a barrel repeatedly over the quarter, but many managers were underweight the sector, which accounts for a whopping 23% of the TSX.

Financials and utilities stocks also offered strong returns, but again, many managers were underweight in those sectors. Underweighting the largest sectors is a strategy often used to minimize the risk of wild fluctuations.

“Only four of the S&P/TSX sectors outperformed the benchmark in the second quarter but the gap in returns between the best- and worst-performing sectors narrowed to the lowest level since the second quarter of 2004,” said Kathleen Wylie, a senior research analyst at Russell Investment Group’s Canadian headquarters.

Fortunately for investors, managers that were underweight in three of these sectors gained ground with their overweighting in the Consumer Discretionary sector, which also outperformed the market. The under-performing tech sector was largely underweighted by active fund managers, further enhancing their returns.

“There was a smaller range between the top-performing and bottom-performing stock,” Wylie said. “Less dispersion at the sector and stock level led to less dispersion in manager returns but also made it a more challenging environment for skilled managers to add value.”

Value oriented managers continued to outperform their peers in the growth market, with median returns of 3.3% compared to 2.6%. While this marks the fifth consecutive quarter for value manager out-performance, only 40% beat the market, down from 60% in the first quarter. The top value managers earned 6.6%, while the worst performers posted a loss of 0.1%.

Value managers may have started the quarter with smaller energy holdings that their growth-oriented counterparts, but they more than made up for this oversight with heavier weightings in Utilities, Consumer Discretionary and Financials. Growth managers also tended to have more exposure to underperforming sectors such as Materials, Health Care and Technology.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com