The investing environment was better for active managers overall in the second quarter of 2008 with 41% beating the benchmark, up from a record low of less than 20% in the first quarter.

That’s according to new data released by Russell Investments.

“The environment was more favourable but still presented challenges for active managers because of its narrowness, with only the energy and materials sectors beating the benchmark. Active managers, on average, are underweight those sectors which together account for almost half the index so this made it difficult to beat the benchmark,” says Kathleen Wylie, a senior research analyst at Russell Investments Canada.

“And if you look at what drove the market in the second quarter, it was the energy sector, which accounted for 6.1% of the 9.1% return of the S&P/TSX composite index. The energy sector was up 23% in the second quarter following a 1% return in the first quarter. As a result the median large cap manager return came in at 8.2% which lagged the S&P/TSX composite return of 9.1%.”

Most active managers benefited from underperforming gold stocks. The S&P/TSX gold sub-sector fell 2.5% after increasing 16.5% in the first quarter. Most active managers are underweight gold stocks. This strategy improved benchmark relative performance in the second quarter.

Eighty-one per cent of growth managers beat the benchmark compared to just 12% of value managers. That compares to just 25% of growth managers and 27% of value managers beating the benchmark in the first quarter of 2008. The median large cap growth manager return was 10.4% compared to the median value manager return of 4.7%.

“Value managers had significantly larger underweights to the top-performing energy and materials sectors compared to growth managers at the start of the quarter, which hurt their relative performance,” says Wylie.

“Growth managers on average had a weight similar to the index weight in energy while value managers were 3% underweight the sector on average.”

At the stock level, growth managers were more favourably positioned in the top-contributing stocks in the second quarter. For example, most growth managers held Potash Corp. in the quarter and were on average notably overweight the stock compared to the index. Potash rose 48% in the second quarter and was the top-contributing stock to the index return. The other top-contributing stocks that benefited growth managers generally were Canadian Natural Resources (up 44%), Encana (up 19%), Suncor (up 19%), Agrium (up 72%).

In the third quarter, the environment has already started to improve for value managers as investors saw some life in the financials sector and a pull-back in resource stocks. Since value managers on average are roughly 3% overweight financials, 3% underweight energy, and 5% underweight materials, value managers have seen a notable improvement in their benchmark relative performance.