Q data reveal toughest active manager climate since report s inception:

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1 JULY Russell Investments Canada Active Manager Report data reveal toughest active manager climate since report s inception: Only 17% of Canadian large-cap equity managers beat the benchmark Early look at : Active manager environment rebounded in first three weeks of July Five-year view shows 61% of active large cap managers beat the benchmark Kathleen Wylie, CFA Head, Canadian Equity Research Russell Investments Canada Limited Kathleen Wylie, Head, Canadian Equity Research for Russell Investments Canada, is one of a large team of analysts at Russell Investments globally who monitors the performance of active managers. The Russell Investments Canada Active Manager Report is based on recently released data from 142 Canadian Institutional money manager products. (All data cited is gross of fees) It was a good news/bad news story for investors in the second quarter of. The good news: the benchmark S&P/TSX Composite Index rose 5.1% in the period and marked its largest quarterly gain in two years. The bad news: only 17% of large cap equity managers in Canada beat the benchmark the lowest percentage on record since late 1999 and down from 41% in the first quarter of. In addition, the median large cap manager return was 3.4%, which was well behind the benchmark Index return. These and other notable observations are based on a quarterly survey of 142 Canadian institutional money manager products. The first half of presented Canadian large cap managers with considerable challenges to beat the benchmark, particularly due to the strength in the Energy sector and gold stocks. Gold stocks surged a record 41% in the second quarter with large cap managers roughly 3% underweight on average. That followed a 39% increase in gold stocks during the first quarter. Four of the top 10 contributing stocks % OF LARGE CAP MANAGERS THAT 10 6 Challenging start to Long term Quarterly Average (10 years) = 55%

2 within the Index in the second quarter were gold stocks, accounting for more than 25% of the Index s gains, including Barrick Gold, which was the top-contributing stock but held by less than of large cap managers. The strength in gold stocks in the first two quarters of the year means their weight in the Index has doubled since the end of. Since most managers are generally underweight this sector, gold has become the latest concentration issue. However, it s not as much of an issue as it was in when the weight of gold stocks peaked at 14% in the Index and managers were underweight by 6% on average. Strength in the Energy sector also presented challenges for Canadian large cap equity managers who are 3% underweight on average. Within Energy, managers generally were hurt by strength in TransCanada Corporation and Enbridge, which rose 15.6% and 9.4% in the second quarter, respectively. Those two stocks started the quarter with a combined weight of nearly 5% in the Index with TransCanada held by only 49% of large cap managers and Enbridge held by only 54%. On a positive note, large cap managers have relatively heavy exposure to Canadian Natural Resources, which rose 15.7% in the second quarter and ranked as the second top-contributing stock in the Index. The stock is held by 67% of large cap managers, so its gains did help their benchmark-relative performance. Active managers still added value over the longer term While this marks the second consecutive quarter that active managers have struggled to beat the benchmark, we saw six consecutive highly favourable quarters for active managers through the end of. Active management will struggle in certain periods, particularly in Canada with such a concentrated index. 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 by 175 basis points per quarter. This reinforces that skilled investment managers can add value over the long run. Narrow sector breadth a key factor Sector breadth narrowed in the second quarter with only three sectors beating the benchmark for the period, down from five in the first quarter. In addition to Materials and Energy, Utilities outperformed. Large cap managers on average were overweight Utilities, which helped, but they also had notable overweights to Information Technology, Consumer Discretionary, Industrials and Consumer Staples, which all underperformed. Underweights to Telecom and Financials were beneficial to active managers overall since those two sectors were among the underperformers. Overall, large cap managers were favourably positioned in only three of 10 sectors. The second quarter echoes the experience in the third quarter of, which was the second-worst quarter for active managers since available records in In, 18% of managers beat the benchmark (compared to 17% this past quarter) and the situation was similar in that sector breadth was narrow with only three ahead, and Energy and Materials among the outperformers. Gold stocks jumped 18% in the third quarter of ; not nearly as extreme as the 41% jump in the second quarter of, but they represented a larger weight in the Index at the time so they had more of an impact. All styles lag the benchmark All investments styles in the active management report struggled to beat the benchmark return of 5.1% in the second quarter of, with a nominal difference in median returns. Dividend managers fared slightly better with a median return of 3.5%, compared to 3.4% for growth managers and 3.2% for value. Dividend managers would have been hurt most by the strength in Canadian gold stocks since they were underweight by nearly 5% on average. Value managers were just over 4% underweight gold stocks while growth managers were less than 1% underweight. Dividend managers on average were less overweight the Industrial and Consumer Discretionary sectors, compared to value and growth managers, which helped them since those sectors underperformed. 2 JULY

3 Dividend managers also have an underweight to Information Technology, which underperformed, punishing growth and value managers who have significant overweights to these stocks. Growth managers benefited from an overweight to the Energy and Materials sectors and notable underweights to the underperforming Telecommunication and Financial sectors. Within Financials, diversified banks underperformed, rising 2.2% in the quarter. That would have helped value managers most since they were roughly 8% underweight on average heading into the quarter, compared to growth managers who were roughly 5% underweight and dividend managers who were only 2% underweight. The most widely held bank stocks by large cap managers overall are Toronto Dominion, Royal Bank and Bank of Nova Scotia and all three underperformed. Those bank stocks were less widely held by value managers than by growth or dividend managers. The second quarter displayed little variation in the performance of the styles, but looking back, there are more quarters when one style significantly outperformed others, so maintaining a multi-style approach in a multi-asset portfolio can help to weather swings. % OF LARGE CAP VALUE MANAGERS THAT HAVE % OF LARGE CAP DIVIDEND MANAGERS THAT HAVE % of dividend managers ahead in Average Back to = 57% % OF LARGE CAP GROWTH MANAGERS THAT HAVE 10 19% of value managers beat the benchmark in 10 Only 18% of growth managers beat the benchmark in 6 6 using Russell Universe data. Long Term Average Value (10 years) = 54% Long Term Average Growth (10 years) = 54% Small cap managers ahead of large cap but struggle against the benchmark Small cap stocks as measured by the S&P/TSX Small Cap Index, posted the strongest quarterly return since the fourth quarter of, surging 17.9% in the second quarter, well ahead of the S&P/TSX Composite Index return of 5.1%. The strength was driven mainly by a surge in Materials stocks, which were up 36.2%, led by gold and silver companies. Gold stocks surged 47.3%, and have a weight of over 18% in the small cap Index, while small cap managers on average are 12% underweight gold stocks. Energy stocks were also strong, up 25.6% in the second quarter, and small cap managers on average were less than 1% underweight. Small cap managers struggled to the beat the benchmark because of the strength in the Materials and Energy sectors, which accounted for 86% of the S&P/TSX Small Cap Index gain in the second quarter. The median small cap manager return was 7.4%, a record 10.5% behind the Index return, but well ahead of the median large cap manager return of 3.4%. 3 JULY

4 Small cap managers were hurt once again by narrow sector breadth, with only two of 10 sectors beating the benchmark, the same as in the first quarter. Small cap managers were favourably positioned in only two of 10 sectors, down from four out of 10 in the first quarter. Their underweights on average to Utilities and Healthcare were beneficial, since both sectors underperformed, but overweights to Financials, Industrials, Consumer Staples, Consumer Discretionary, Telecommunication and Information Technology all hurt since those sectors all underperformed. Overall, less than 3% of small cap managers were able to beat the benchmark in the second quarter, slightly less than as the 8% in the first quarter and down from 74% in the fourth quarter of. The two quarters combined were the lowest percentage since Russell Investments began closely tracking the data in. Despite the difficult start to the year, small cap managers have added significant value against the benchmark and relative to large cap managers over time. In the last 10 years, the median small cap manager return was ahead of the benchmark by 115 basis points and beat the median large cap manager by roughly 50 basis points on average per quarter. Even over five years, the small cap median is ahead of the benchmark by roughly 170 basis points and ahead of the median large cap manager return by more than 40 basis points on average per quarter. Early look at : Active management environment looked notably better in early July SMALL CAP MANAGER ALPHA (MEDIAN MANAGER RETURN MINUS S&P/TSX SMALL CAP INDEX) The third quarter of through July 22 looked significantly better for active managers. In the first three weeks of the quarter, the S&P/TSX Composite Index was up 4. and gains were broad, with six out of 10 sectors ahead, compared to only three in the second quarter. Large cap managers are favourably positioned in eight sectors with overweight positions in five of the six outperforming sectors and underweight positions in three of the four underperforming sectors, including Energy and Materials. In terms of style, the picture was less clear. Dividend managers may have the early edge given strength in bank stocks through July 22 and the underperformance of gold. Dividend managers have a larger weight in banks and a lower weight in gold stocks, compared to value and growth managers. It s still early in the third quarter, but the investing environment looks significantly better for large cap managers to beat the benchmark. For the Index to be solidly higher and managers able to outperform is the best of both worlds. 12% 8% 4% -4% -8% -12% Small cap managers lag by record amount Long Term Average Alpha (10 years) = 1.15% 4 JULY

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