Active Canadian equity investment managers struggled in the second quarter of 2005 with only 43% of large cap managers able to outperform the S&P/TSX composite index, according to a new report from Russell Investment Group.

The median large cap manager trailed the S&P/TSX composite’s return of 3.6%, posting a modest gain of 3.2% in the second quarter.

Strong demand for energy pushed the price of crude oil to US$60 a barrel by quarter end, which caused the energy sector to lead all other S&P/TSX sectors for the second consecutive quarter.

Russell says this presented a challenge for active managers, who tend to be underweight in the energy sector, which accounts for approximately 23% of the S&P/TSX composite index. Typically, managers tend to underweight large sectors to limit absolute downside risk.

Active managers were also hurt by being underweight in the utilities and financials sectors, which also outperformed the market.

“Only four of the S&P/TSX sectors outperformed the benchmark in the second quarter but the gap in returns between the best- and worst-performing sectors narrowed to the lowest level since the second quarter of 2004,” said Kathleen Wylie, a senior research analyst at Russell Investment Group’s Canadian headquarters, in a release.

“As well, there was a smaller range between the top-performing and bottom-performing stock. Less dispersion at the sector and stock level led to less dispersion in manager returns but also made it a more challenging environment for skilled managers to add value.”

On a positive note, active managers were helped by having an overweight in the consumer discretionary sector, which outperformed the index, and by being underweight information technology, which was once again the worst performing sector.

For the fifth consecutive quarter, Russell says the median value manager outperformed the median growth manager, with a median return of 3.3% compared with 2.6%.

Within the Value Universe, only 40% of the managers beat the index, down from over 60% in the previous quarter. Although value managers started the quarter with a larger underweight in the top-performing energy sector, they were favourably positioned in utilities, consumer discretionary and financials, which were the other three top- performing sectors that beat the S&P/TSX composite. It also helped that value managers were underweight the worst three sectors: materials, health care and information technology.