Canada Connection: Advantage, small-caps

At the half-way point of 2007, Canada’s small-cap fund managers have extended their winning streak.

For the third consecutive quarter, the country's small-cap managers outperformed their counterpart large-cap managers, according to Russell Investment Canada's report for the second quarter ended June 30. (Based in Tacoma, Russell Investment Group says it advises institutional clients with total assets of over C$2.0 trillion. Russell follows 31 small-cap Canadian funds and 75 large-cap ones.)
              
Kathleen Wylie, Russell's senior research analyst, said in her review that the median small-cap manager returned 7.1% during the most recent three-month period, compared with the median large-cap manager return of 6.4%.
              
That is largely because Canadian small-cap managers won out by having a smaller weight in the broadly underperforming Canadian financial services sector. Small caps had an average of 14% in that sector, compared with 30% for large cap.
               
As well, small-cap managers on average had roughly 12% of their portfolios in the positive consumer discretionary sector, compared with only a 5% weight by large-cap managers.
              
Wylie noted that despite the rally in resource prices such as oil and base metals in 2005 and most of 2006, small-cap managers still lagged their large-cap counterparts.
               
"However, we're half-way through the year and I'm still more encouraged by the active management environment (among small-cap managers) now than I have been in the last couple of years when the market was dominated by resource stocks," she said. 

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