Energy stocks became a bigger drag on the market and mutual funds in the past several weeks than the hard-hit financial sector, threatening...
Energy stocks became a bigger drag on the market and mutual funds in the past several weeks than the hard-hit financial sector, threatening a scenario that has helped some fund managers avoid double-digit losses.
The popular trade of going long on energy and shorting financial stocks “worked magnificently since 2004” but has recently loss its luster, says JPMorgan strategist Thomas Lee.
He expects investors will shift money from energy stocks into financial and domestic holdings. Recently he cut his rating on the energy sector to “neutral” from “overweight.”
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Since oil has dropped from its July high above $147 a barrel, it has dragged down energy holdings. To be sure, oil prices are volatile and recently ticked up on worries about weather disruptions.
Following oil’s peak, the Standard & Poor’s 500 index rose 2.2 percent through Monday, but it would have climbed 4.3 percent without energy, compared with a smaller 1.5 percent gain without financials.
Both sectors make up about 14 percent of the index. Large-cap mutual funds with hefty financial stakes have struggled in the past year due to the credit crisis, but some are gaining in recent weeks.
Anton Schutz, portfolio manager of two Burnham financials-focused mutual funds, thinks managers who stay away from the financial sector are going to pay as the industry consolidates, and as mortgage-backed securities stabilize.
“If they don’t get on the train, they are going to underperform all their benchmarks,” he says.
Not everyone is rushing toward financials, though.
FBR Capital Markets analyst Steve East recently downgraded energy to “neutral” from “overweight” but remains neutral on financials.