For the second consecutive quarter, active Canadian equity investment managers faced a challenging environment, due in large part to their underweight in the soaring energy sector.

The median large cap manager posted a return of 11.0% in the third quarter of 2005, according to the Russell Canadian Active Manager Report.

This was behind the S&P/TSX composite index’s return of 11.6%.

Only 38% of large cap managers outperformed the index in the quarter, down from 43% last quarter and the lowest since the second quarter of 2003.

For the third consecutive quarter, energy was the strongest performer of all TSX sectors, up 25.7%. The sector was fueled by a surge in energy costs that moved the price of oil past the US$70 a barrel mark. Energy stocks were also boosted by rising natural gas prices, which increased nearly 80% in the third quarter.

“Since most active managers were underweight the energy sector at the start of the quarter, their benchmark-relative performance suffered. By the end of the quarter, the sector accounted for approximately 27% of the S&P/TSX composite index,” said Kathleen Wylie, a senior research analyst at Russell Investment Group’s Canadian office, in a release.

“However, not all managers that were underweight energy were hurt by this positioning. Many managers were able to add value through superior stock selection within the sector. The only other sector that beat the S&P/TSX composite index return was utilities, which was up 16.8% in the third quarter. This is another sector that large cap managers tend to be underweight.”

For the first time in six quarters, the median growth manager (+10.7%) outperformed the median value manager (+10.3%).

Within the value universe, only 9% of the managers were able to beat the benchmark, the lowest since the first quarter of 2000.

Small cap stocks struggled in the third quarter, as the S&P/TSX small cap index return of 8.5% trailed the broader index return of 11.6%. However, since Canadian small cap managers generally had a small overweight to the energy sector, 78% were able to beat the S&P/TSX small cap index return.