Energy Funds Shrug Off Talk of a Bubble

Soaring oil prices are turning energy funds into the tech funds of the early 21st century. But will they end up suffering the same unpleasant fate?

Not too long ago, investors bent on chasing the fashionable tech trend dumped cash into funds filled with highfliers like Microsoft (MSFT Quote), Cisco Systems (CSCO Quote) and Sun Microsystems (SUNW Quote). Tech fund returns soared in response to this tidal wave of hot money, a wave many investors thought they could surf forever. That is, of course, until it all came crashing down.

Less than a decade later, momentum investors are paying the same type of attention to energy funds. According to fund tracker Lipper, energy funds saw inflows of $160 million in 2001. In 2004, that number jumped to $4.65 billion. And 2005 is rocketing even higher, with $2.5 billion in new money in just the first two months of the year alone.

At the end of February, energy funds held record assets of $23.3 billion. While that may seem like chump change compared to the assets held in tech funds during the bubble -- tech funds hit $119 billion in December 1999 -- the rate of inflows into energy funds has reached a level on par with that of the late-1990s madness. Flows into energy funds in February 2005 were up 11.4%, says Lipper, more than the 11.2% move into tech funds in December 1999, the highest percentage jump during the bubble.

In terms of performance, the average energy fund is up nearly 14% year to date, according to Morningstar, easily making it the top-performing fund category. Energy funds are up 39% over the past year, outpacing even oil's rise from the mid-$30s for a barrel last year to recent levels in the mid-$50s.

Energy funds may be retracing the initial trajectory of tech funds in the late 1990s, but Don Cassidy, senior research analyst at Lipper, says there is a notable difference between the tech and energy stories, which should keep investors from experiencing the same painful lessons they learned last decade.