Since the beginning of November, financial stocks have been in demand as bond yields push higher thanks to raised inflation and growth expectations. In an attempt to profit from this trend, hedge funds have rotated away from tech into financials according to recent 13 F filings.

However, according to research from Goldman Sachs, this rotation is not enough to make up for years of poor returns from the financial sector, which has resulted in a severe underweight for the industry among hedge funds.

Hedge Funds Are Still Wary Of Financial Stocks

According to Goldman’s research hedge funds have 11% net exposure to Financials, which ranks as their largest net sector underweight vs. the Russell 3000, at -430 basis points. Mutual funds, on the other hand, have a much larger exposure to the sector. Financials is the most overweight sector among large-cap core mutual funds. These funds have a 17% net exposure to financials 250 bps overweight versus the S&P 500. Meanwhile, large-cap growth funds have a 7% net exposure, which works out at 400 basis points above the Russell 1000 growth.

The one class of mutual funds that is actually underweight financials compared to the benchmark is large-cap value mutual funds. The allocation to financials by large-cap value mutual funds is just over a quarter at 26.3%, but this is still 50 basis points underweight versus the Russell 1000 Value benchmark.

Interestingly, further data shows that value funds were overweight financials heading into the fourth quarter of last year. These funds slashed their allocation to 50 bps underweight from a 40 bps overweight after Trump’s election. Considering the move in financials since Trump’s election this sudden switch could be just a result of increased market weighting rather than an accurate reflection of manager sentiment.

One sector both mutual funds and hedge funds appear to agree on is energy. Goldman highlights that since the beginning of the year the performance of energy stocks and crude prices have diverged significantly. Since early December, while the S&P 500 has rallied by 8% and WTI has climbed by 2%, the S&P 500 Energy sector has declined by 3%. Energy stocks have performed far worse than is justified by oil prices. There is also evidence which shows that financials and energy stocks outperform when rates and inflation rise. With this being the case, it is no surprise that both hedge funds and mutual funds entered 2017 overweight energy.