Only 17% of active large-cap equity managers beat the benchmark S&P/TSX Composite Index in Q2, marking their poorest performance since the data was first collected in Q3 1999, Russell Investments says.

The S&P/TSX climbed 5.1% in Q2, its biggest gain in two years, yet the median large-cap manager return was lower, at 3.4%. Fewer active large-cap equity managers beat the index compared to the previous quarter, when 41% of managers performed better than the index, Russell Investments says in a release Thursday.

All data is gross of fees.

Kathleen Wylie, head of Canadian equity research at Russell Investments, says in a statement that strength in the energy sector and gold stocks made for a challenging first six months for Canadian large-cap managers who were underweight in the equities.

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Gold stocks surged by a record 41% in Q2 as large-cap managers were, on average, about 3% underweight. Four of the fastest-rising gold stocks in Q2 accounted for more than 25% of the index’s gain, Russell says.

“With the strength in gold stocks in the first two quarters of the year, their weight in the Index has doubled since the end of 2015; and since most managers are generally underweight this sector, gold has become the latest concentration issue,” Wylie says. “Still, it’s not as much of an issue as it was in 2011 when the weight of gold stocks peaked at 14% in the Index and managers were underweight by 6% on average.”

Large-cap equity managers were also about 3% underweight on average in the energy sector in Q2, which surged on big gains for TransCanada, Enbridge and Canadian Natural Resources, among others.

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Russell says over the past five years, 61% of large cap managers have beaten the benchmark by about 50bps per quarter, on average.

Only three sectors beat the index in Q2, down from five in the previous quarter, as materials, energy and utilities outperformed the S&P/TSX. The underperformers were information technology, consumer discretionary, industrials and consumer staples.

All investing styles’ median returns lagged the stock market index in Q2, Russell says, including those of dividend and growth managers.

Through July 22, Q3 looked considerably better for active managers, with the S&P/TSX up 4.0% and large cap managers “favourably positioned in eight sectors,” Russell says.

The firm’s report is based on a quarterly survey of 142 Canadian institutional money manager products.

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