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The Momentum factor picked up where it left off at the end of the first quarter, turning in another standout performance in the April-through-June timeframe and ending the second quarter as the factor most relevant to positive performance. Momentum benefited from continued optimism in markets that inflation is coming under control and that the U.S. economy will be able to achieve a soft landing. While the rate cuts that were predicted at the beginning of the year have yet to materialize in the U.S. and other major markets, investors expect that many central banks will begin easing during the second half of the year.The performance of other factors was more mixed during the second quarter, with Value outperforming in Japan, Europe, and Emerging Markets (EM) while underperforming in other markets. Notably, the Quality factor underperformed across most markets, except in EM, the UK, and Canada.Overall, the second quarter was another positive one for most markets in local currencies, but returns were more mixed in U.S. dollars (USD). This was due to a strengthening in the dollar after the timeline for U.S. Federal Reserve (Fed) rate cuts was pushed out and U.S. economic data came in stronger than anticipated. Many markets also continued to experience narrow leadership driven by the information technology sector on the back of the AI (artificial intelligence) theme, which resulted in a challenging environment for active managers.On balance, the second quarter was a more favorable environment for active managers in Global ex-U.S., U.S. Small Cap, Japan, Australia, and Canada, while being more challenging for Global, U.S. Large Cap, EM, Europe, UK, Listed Infrastructure, and Global Real Estate managers. Sector dispersion remained wide, with narrow and fervent market leadership impeding managers’ relative returns.The information technology sector was once again the strongest performer across most regions due to investor enthusiasm over the AI theme. Additionally, utilities performed well during the quarter as investors bet on the growing demand for energy driven by increased usage of AI-related hardware. Meanwhile, consumer-related sectors, industrials, and real estate underperformed across most markets, with weakness also seen in the materials sector in the U.S., EM, and Canada.With inflation on a path to receding and a hard landing appearing increasingly unlikely, investors remain patient for normalization despite frustrations over the shorter-term in how narrow market returns have been. Many are continuing to question the valuations for some of the tech names that play into the AI theme, including overcapacity and excessive AI capital expenditures.The main risks in the short-term remain geopolitically driven, including the upcoming U.S. elections in November, which have already contributed to some recent market volatility. The potential for the rate-cutting cycle to be pushed further down the road is also another important watchpoint for investors.At Russell Investments, our unique relationship with underlying managers affords us special access into the latest active management insights. Here are the key takeaways in second-quarter active management performance from our manager research team.

Global equities
The second quarter was a challenging environment for active Global equity managers while proving favorable for International equity managers, with around 30% and 65% of products outperforming their respective benchmarks.

China buckled its recent downtrend, rebounding and pulling EM and Asia into positive territory. Conversely, Japan reversed downward following a strong first quarter. The U.S., meanwhile, remained ahead of the broad index, led by the 
Magnificent Seven 
Magnificent Seven .

U.S. equities
The second quarter was a challenging environment for active U.S. Large Cap managers while being more favorable for U.S. Small Cap managers, with around 35% and 55% of products outperforming their respective benchmarks.

Emerging Markets equities
The second quarter was a challenging environment for active Emerging Markets managers, with around 40% of products outperforming the EM index.

UK and European equities
The second quarter was a challenging environment for active UK equity and European equity managers, with ~40% and 45% outperforming their respective benchmarks.

Japan equities
The second quarter was a favorable environment for active Japanese equity managers, with around 60% of products outperforming the TOPIX index.

Australian equities
The second quarter was a moderately favorable environment for active Australian equity managers, with around 55% of products outperforming the ASX 300 Index.

Canadian equities
The second quarter was a favorable environment for active Canadian Large Cap equity managers, with around 60% of products outperforming the S&P/TSX Index.

Long/Short equity
The second quarter was a challenging environment for Long/Short strategies, with the HFRI Equity Hedge Index advancing 1.1%. The HFRI Equity Market Neutral Index outperformed the broader HFRI Equity Index, advancing 2.9% as it held up well in April’s market decline.

Real estate and infrastructure
The second quarter was a challenging environment for active Global Listed Real Estate and extremely challenging for Global Infrastructure managers, with around 45% of the former and none of the latter products outperforming their respective benchmarks.In real estate, exposure to Japan developers was a headwind, while exposure to U.S. healthcare and U.S. technology helped offset losses for the quarter. U.S. industrials held back gains within U.S. real estate.In infrastructure, exposure to non-benchmark holdings in U.S. rail hurt manager performance on the back of low volumes to end 2023. Meanwhile, underweights to airport services were additive for managers.More By This Author:Navigating The Markets: Insights From Our Q2 Economic And Market Review
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