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TSX trader watches the actionCHRIS YOUNG

Prolonged tough market conditions have put Canadian asset managers under a lot of pressure, but some bigger bets on energy, materials and financials drove Canadian large-cap asset managers to exceed the country's benchmark index last year by a solid margin.

With a median annual return of 9.4 per cent, more of these asset managers beat the S&P/TSX composite index's return in 2012 than in the prior two years, according to a new report by Russell Investments Canada Ltd. Still, the middle of the year proved problematic for both the money managers and their clients. And so far, the outlook is mixed for 2013.

The markets rode a roller coaster through last year. First, the S&P/TSX composite got off to a solid start, climbing 10 per cent through the first two months of the year. Many large cap managers also succeeded through the period. A full 66 per cent of them beat the benchmark in the first quarter according to the Russell Investment's report based on data from more than140 Canadian institutional equity manager products.

But then the market took a deep dive from March until May. While 69 per cent of large-cap managers beat the S&P/TSX in the second quarter, investment managers still lost money, the report notes.

In mid-May the S&P again began to climb to hit a high in September. This covers the weakest part of the year for managers, where 82 per cent failed to exceed the benchmark – the most severe figure Russell Investments has ever recorded.

Finally, there was a good rebound in the fourth quarter as more than 80 per cent of large cap managers beat the index, which marks the largest number of managers bettering returns on the S&P/TSX since the second quarter of 2004.

Russell Investments attributes the mid-year slump for asset managers to the relative strength in the energy and material sectors. Many have big underweight positions in these sectors and need them to lag in order for management teams to outperform.

That's why the start of 2013 has been a mixed bag: energy and financials are outperforming, but the materials sector is underperforming.

Asset managers also have other concerns, though. More and more, simply one-upping an index isn't enough. Investors are looking for money management firms to meet demanding growth standards.

McKinsey & Co.'s recent and aptly named study, The Asset Management Industry: Outcomes are the new alpha, explains that North American players have had a tough time attracting new assets in the past four years. Shell-shocked investors are dealing with market volatility caused by the chaos in Europe, while the U.S. "fiscal cliff" and debt ceiling are constant topics of debate.

The study, published near the end of 2012, notes profit levels of the asset management industry in Canada and the U.S. are still 20 per cent beneath the 2007, pre-recession peak. Costs are high, prices are low and there's a widening earnings gap between the firms that do and do not make money.

Still, 2013 could be a turning point. Early reports indicate that money managers may have more cash to play with this year, should the move back toward equities prove a longer-term trend in the markets.