Just 17% of large cap equity managers beat the benchmark S&P/TSX Composite Index in the second quarter, according to a report by Russell Investments Canada. That’s down 41% from the first quarter, and the lowest percentage seen since Q3 of 1999. The median large cap manager return in the last quarter was 3.4%, well behind the benchmark return.
“The first half of 2016 presented Canadian large cap managers with considerable challenges to beat the benchmark, particularly due to the strength in the energy sector and gold stocks,” said Kathleen Wylie, head of Canadian equity research at Russell Investments Canada.
Gold stocks spiked a record 41% in Q2, with large cap managers averaging about 3% underweight, Wylie added. Four of the top 10 contributing stocks in the index in Q2 were gold stocks, accounting for more than 25% of the index gain. That included top contributing stock Barrick Gold – a stock held by less than 20% of large cap managers.
“With the strength in gold stocks in the first two quarters of the year, their weight in the index has doubled since the end of 2015; and since most managers are generally underweight in this sector, gold has become the latest concentration issue,” Wylie said. “Still, it’s not as much of an issue as it was in 2011, when the weight of gold stocks peaked at 14% in the index and managers were underweight by 6% on average.”
Q2 marks the second consecutive quarter during which active managers struggled to beat the benchmark, according to Russell Investments Canada. However, those quarters were preceded by six consecutive highly favourable quarters for active managers.
“There will be periods where active management struggles, particularly in Canada with such a concentrated index,” Wylie said. “But over the last five years, including these challenging periods, an average of 61% of large cap managers have beaten the benchmark by an average of roughly 50 basis points per quarter. Even more interesting is that the first quartile managers’ median return has outperformed it by 175 basis points per quarter. This reinforces that skilled investment managers can add value over the long run.”
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