“Do your mutual-fund managers have too much energy?” That’s the question asked by Ken Brown in today’s Wall Street Journal.

“We aren’t talking about the enthusiasm they bring to managing your money, but about the concentration of their portfolios.”

“In the past few years, a lot of supposedly diversified stock funds loaded up on technology shares, only to suffer when tech stocks crashed. Now a bunch of funds are making big bets on energy stocks — raising the specter of another unpleasant surprise.”

“Fidelity Fifty Fund, with $433 million in assets, has more than half of its portfolio in energy issues. Nearly a quarter of MFS Mid-Cap Growth Fund’s portfolio is invested there, and ‘it should be higher,’ given the strong outlook for energy stocks, manager Mark Regan says.”

“More than two dozen U.S.-stock funds that don’t specialize in energy boast energy weightings at least three times the sector’s recent 7.5% weighting in the Standard & Poor’s 500-stock index, according to estimates from Chicago fund-tracking firm Morningstar Inc.”

“What is the harm? Not much, if energy stocks sustain the kind of performance they have shown in the past few years. In the three years ended Wednesday, the Dow Jones U.S. Energy Index rose 31.8%, compared with 5.25% for the S&P 500.”

“But if the notoriously cyclical energy sector doesn’t behave as fund managers hope, investors could get burned. So far this year, for instance, the Dow Jones energy index has fallen about 10%, and many energy-heavy funds have fallen, including Fidelity Fifty, which is down about 9% for the year through Wednesday, while the S&P 500 is down about 10%.”

“Further, trying to pick the stock sectors that will shine in coming months is always a tricky game. ‘Usually, you know a hot sector after the fact, not before,’ says Marshall Blume, a finance professor at the University of Pennsylvania’s Wharton School. Overweighting one sector can hurt performance relative to an index. ‘If [that sector] goes up, you’re happy. If it goes down, you’ve lost,’ Prof. Blume says.”

“Like an increasing number of funds, most of the current crop of energy-heavy funds are technically ‘nondiversified,’ which means they have wide latitude to place big sector bets.”

“Yet they also aren’t dedicated energy funds, meaning investors might not realize what they’re buying. Plenty of fund shareholders were stunned last year when they discovered — too late — that their funds had racked up big gains by investing in technology shares, only to plummet when the tech bubble burst.”