If your portfolio has been left in the dust by the S&P/TSX composite index, don't beat yourself up too much. Most professional money managers are having a heck of a time trying to top the benchmark.
Fewer than 20 per cent of large-capitalization Canadian institutional fund managers beat the index in the first quarter, according to a survey by Russell Investments Canada. That's down from 41 per cent in the fourth quarter and the lowest reading since Russell started monitoring the data in 1999.
“I would describe this environment as the most hostile I've ever seen,” said Kathleen Wylie, senior research analyst at Russell in Toronto.
Most small investors would probably agree.
But why did so many pros trail the index?
Two words: energy and materials. These two sectors, which together account for nearly half of the S&P/TSX, were the only ones to generate positive returns in the first quarter.
But most large-cap Canadian equity managers had underweight positions. Some had no exposure at all to gold stocks, which seriously hurt their returns; during the first quarter, the gold sector surged 8.4 per cent.
The survey isn't meant to be a definitive look at how professional fund managers have fared. The results are based on the performance of 115 institutional money managers running investment pools that cater to pension funds, foundations and other non-taxable investors. The results are based on total returns, including dividends, but excluding management fees and expenses.
These managers may have different investment styles and objectives than mutual funds, which are not included in the survey. For one thing, the institutional managers in the survey usually hold less cash and have a smaller weighting in foreign stocks than mutual funds. Still, the survey provides a window into the challenges the pros face in beating the benchmark.
It wasn't like the hurdle was set very high. In the first quarter, the S&P/TSX lost 2.8 per cent, including dividends. But the median return of large-cap managers in the survey was a loss of 3.9 per cent.
Even as most managers trailed the index, some investment styles performed better than others. About 27 per cent of value-oriented money managers beat the index, up from 16 per cent in the fourth quarter and just 9 per cent in the third. Value investors look for stocks that are cheap, based on price-to-earnings, price-to-book and other measures.
But as the performance of value investors was improving, growth managers – who focus on stocks with rapid earnings growth and price momentum – were struggling. Just 24 per cent beat the index, down from 53 per cent in the fourth quarter and 75 per cent in the third.
The improvement in value managers' performance reflects a rebound in financial stocks, which had been beaten down by the credit crisis. Many value investors scooped up the stocks, believing they'd fallen too far.
“Value managers have struggled for the better part of three consecutive years, so this improvement is encouraging,” Ms. Wylie said.
“The last time value specialists struggled that much was during the technology bubble, but it's important to note that, following that challenging period, value managers bounced back significantly for the next two years, in 2001 and 2002.”
Many value managers have also had a strong April, so the second quarter could see even more improvement, she said. That's something to keep in mind for investors who are wondering when their own portfolios will rebound.
© The Globe and Mail
