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(Tan Wei Ming)
(Tan Wei Ming)

Most Canadian equity managers beat index in first quarter Add to ...

Seventy-five per cent of Canadian institutional equity managers beat their benchmark index in the first quarter, a survey by Russell Investments Canada Ltd. indicates.

The percentage of Canadian large-cap managers who outpaced the 3.1 per cent for the S&P/TSX Total Return Index was the highest level since the second quarter of 2004, and up from 57 per cent in the fourth quarter of 2009, the investment firm said on Wednesday.

While the outperformance by most of the 102 institutional money managers surveyed is interesting, keep in mind their performance in this survey also excludes fees, which are significantly lower than for retail mutual funds.

While Russell Investments does this research partly because it sells multi-manager mutual funds using some of using some of the portfolio managers surveyed, it is still interesting to dig deeper on how managers have been faring.

What helped the active managers in the first quarter was the fact that financials contributed 80 per cent of the index performance, and active managers in Canada tend to be overweight this sector, says Kathleen Wylie, a senior research analyst at Russell Investments.

The report also found that 81 per cent of value managers outperformed the index compared with 76 per cent of growth managers. The performance edge had more to do with stocks that they did not own rather than the stocks they did own.

For instance, the gold sector fell by 6.5 per cent in the first quarter. Value managers had a smaller weight - about 5 per cent - in gold stocks than their growth-oriented peers with 10 per cent. The strong performance by the financial sector also helped value managers who are on average overweight this sector, Ms. Wylie says.

But it's a different story in April as managers are facing headwinds from Greece's debt crisis, and looming interest rates weighing on the markets. There was less sector breadth than in the first quarter, with only four sectors beating the 1.7 per cent for the S&P/TSX Total Return in April. Energy and materials were the top performers in the month, but Canadian large-cap managers are generally underweight these sectors that make up about 50 per cent of the index.

"If this is how the quarter plays out, it is going to be challenging for active managers to beat the benchmark," Ms. Wylie acknowledges.

With more uncertainly on the horizon, it looks like it pays to diversify and keep some powder dry.

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