Q4 Equity Manager Report: Playing Defense

Defense wins championships, the saying goes. Did it also help equity managers survive an otherwise bruising fourth quarter?

It appears so. Our manager research team found that defensive managers fared the best among active equity managers during last quarter's market selloff. We also observed many managers using the fall in markets as an opportunity to purchase securities at more attractive valuations. In particular, active managers have been finding value in companies that either continue to benefit from secular growth or are in commodity-related sectors, which sold off heavily at the end of the year.1

In addition, a number of active equity managers have highlighted emerging markets as a source of ideas, due to that sector's attractive relative valuation as well as the high proportion of growth opportunities present. We do note, however, that most managers continue to be mindful of political risks driven by trade tensions and upcoming government elections as they relate to this asset class.

At Russell Investments, our distinct relationship with underlying managers allows us to have unique access to insights from specialists across the manager universe--and there's arguably a no better time to tap into these insights than during bouts of market volatility. With this in mind, we've compiled our chief tactical observations from key geographic and equity regions, in alphabetical order, for the fourth quarter of 2018.

Australian equities

Topping up on energy

  • Managers have taken advantage of the decline in energy companies to increase their overweight to the sector. Gas exposure is the most favored, as managers believe that demand will exceed supply.

Increasing allocations to more defensive names

  • Managers are wary of the impact of falling house prices on stocks reliant on the Australian consumer. As such, they've used the market pullback to increase exposure to healthcare and consumer staples. Due to their exposure to overseas demand, materials are also preferred.

Adding exposure to gold

  • Some managers have bought or added exposure to gold companies. This is motivated by their view of the companies' production ability, with the defensiveness of the sector being secondary.

Canadian equities

Energy lags, but concerns prevent adding on weakness

  • With oil prices--specifically the Western Canadian Select oil price--continuing to be challenged, energy was once again one of the biggest sector laggards. However, the average hire-ranked manager did not add significantly on price weakness, as many of these energy stocks--especially the oil producers--could have significant balance sheet issues if oil prices stay at current levels.
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These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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