One-in-four U.S. large-cap mutual funds have increased their stakes in energy companies this year and many have suffered heavier losses than their peers as a result of ill-timed bets.
The moves into shares of frackers, refiners and integrated oil conglomerates reflect a gamble that the sector will rebound after rising supply and slowing global growth triggered a nearly 60 percent slide in crude prices since the middle of 2014.
But so far, the gambit has not paid off.
"We are kind of holding our nose to buy them, but we see value there," said Ernesto Ramos, who oversees about $15 billion in large-cap equity assets at BMO Asset Management. "We've been selling the defensive part of the portfolio exposed negatively to higher interest rates, such as consumer staples and utilities, and making room for what we see as a slow but gradual recovery in world growth."
BMO's Large-Cap Value Fund boosted it energy exposure to 13 percent from 10 percent at the end of February after buying more shares of ExxonMobil Corp and refiner Valero Energy Corp , for example.
With oil prices down, ExxonMobil is seen as a defensive play because its refineries and chemicals manufacturing can benefit from lower input costs and offset lower profits from crude production.
Shares of Exxon and other oil majors, such as Chevron Corp and ConocoPhillips are hardly doing any better than the S&P 500 Energy Index, which is down 25 percent this year.
Exxon shares are off 21 percent, while Chevron and Conoco are down 32 percent and 34 percent, respectively, reflecting expectations that the global crude supply glut will persist, ultimately weighing on their returns.
A Reuters analysis of 265 actively managed large-cap funds with at least $500 million in assets and combined assets of about $1.8 trillion, revealed that 25 percent of them increased their energy sector bets this year.
That overall group of funds produced an average return of minus 7.17 percent so far this year, according to Lipper Inc, a Thomson Reuters company. And three-quarters of the funds that increased their exposure to energy performed worse than the overall average. (Graphic: http://link.reuters.com/mug75w)