Energy may be the hottest sector this year, but investors are shunning these stocks

Published Sun, Jun 13 20218:00 AM EDT

Energy is by far the top-performing S & P 500 group this year after registering a gain of more than 45%, but the sector remains unloved by investors, according to a new report from Bank of America. The firm found that the entire energy sector makes up just 2% of the average long-only portfolio manager's holdings. This is less than half the weight of the average fund's exposure to Facebook, which stands at 4.2%. If the sector keeps moving higher, funds with little to no exposure may suffer below-market returns. "Not owning Energy wasn't painful when the sector was < 2% of the S & P 500. But the astronomic 92% price return since October has bumped Energy's weight to 3%; another big move in oil may be felt more acutely," the firm said in a note to clients Thursday. Strategists led by Savita Subramanian noted that constrained supply and growing demand could mean "upward pressure on oil for the near-term." "If Energy doubled again, and all other sectors saw average returns, investors with no Energy exposure would sacrifice a full 3 [percentage points] of alpha, more than obliterating relative gains of 59 [basis points] this year," the firm said. One basis point is equal to 0.01%. ESG funds – which invest with a focus on environmental, social and corporate governance factors – are especially vulnerable to underperformance given that 70% of sustainability-focused funds are underweight the sector. Bank of America scanned through fund managers' holdings, finding that within the energy sector Baker Hughes is the most overweighted stock, followed by EOG Resources , Hess Corporation and Pioneer Natural Resources . On the flip side, portfolio managers have very little exposure to Kinder Morgan , Oneok and Marathon Petroleum . Part of the energy sector's comeback this year is thanks to a rebound in demand for petroleum products as economies worldwide reopen. West Texas Intermediate crude futures touched the highest level since October 2018 on Friday, bringing the gain over the last year to nearly 100%. Of course WTI was starting from a low point after plummeting into negative territory for the first time on record in April 2020, but the comeback since is notable nonetheless. But energy stocks haven't kept up — the sector is up just 42% over the last year. "These companies are going to be making more money, but their stock prices may not follow," said Bryan Benoit, U.S. national managing partner at Grant Thornton. Even as oil and gas prices rise, there just isn't a lot of money chasing energy stocks. "The reason why is because investors see headwinds with ESG, and oil and gas stocks are not as in favor with funds as they have been in the past," he said. But while the sector might be less loved in terms of how few funds overall own these stocks, investors are still finding value in the space. "Does it move higher? The answer unequivocally is yes … I have no problem right now at this moment putting new capital into energy because the path in the near-term is going to be higher," Joe Terranova, senior managing director at Virtus Investment Partners, said recently on CNBC's "Halftime Report." He noted that Pioneer Natural Resources looks attractive following its acquisition of Parsley Energy, and also pointed to Suncor and Cheniere as stocks with upside ahead. NewEdge Wealth managing partner Robert Sechan noted that investors can also approach the energy sector with ESG in mind. His firm recently bought EOG Resources because it's a "leader in responsible shale production." "The management team is focused on creating shareholder value [and] leveraging technology to bring an ESG focus to the E & P space," he said, referring to exploration and production within the oil and gas sector. Elsewhere in the energy space Jim Lebenthal, partner at Cerity Partners, believes Marathon Petroleum and Kinder Morgan are attractive bets for investors. He noted that Marathon just closed the sale of Speedway and is using the cash to buy back shares. Meanwhile Kinder Morgan is "raking in cash," which it could use to buy back stock, pay down debt or raise its dividend. "They're going up and they're going to continue to go up so I'm holding them," he said June 2 on "Halftime Report." - CNBC's Michael Bloom contributed reporting.

Oil pump under the blue sky with beam pumping unit in the oil field.

Zheng Zaishuru | iStock | Getty Images

Energy is by far the top-performing S&P 500 group this year after registering a gain of more than 45%, but the sector remains unloved by investors, according to a new report from Bank of America.

The firm found that the entire energy sector makes up just 2% of the average long-only portfolio manager's holdings. This is less than half the weight of the average fund's exposure to Facebook, which stands at 4.2%.

If the sector keeps moving higher, funds with little to no exposure may suffer below-market returns.

"Not owning Energy wasn't painful when the sector was <2% of the S&P 500. But the astronomic 92% price return since October has bumped Energy's weight to 3%; another big move in oil may be felt more acutely," the firm said in a note to clients Thursday.