* Investor flows into energy funds arrested by downturn
* Performance hit by oil price gyrations
* US natural gas weakness also a factor
By Claire Milhench
LONDON, May 11 (Reuters) - Falling oil prices and a worsening economic growth outlook are hitting energy equity fund returns this year, despite a pick-up in investor flows in early 2012.
Investor sentiment turned against growth-oriented investment areas such as energy in mid-March as economic data began to sour. A sell-off in the oil price in May also hit energy stocks and compounded their underperformance against the broader market.
The average energy equity fund registered in Europe flatlined in the first four months of 2012, returning just 0.01 percent in sterling versus a 0.13 percent return by the average natural resources fund, according to Lipper, a Thomson Reuters company that provides fund data and analysis.
U.S.-registered energy equity funds also underperformed their near peers in the 12 months to end-April. The average energy fund lagged natural resource equity funds and utility funds, even though crude oil prices rose in 2011.
"The energy-related funds have really taken a beating, generally underperforming the average fund in their classifications," said Tom Roseen, head of research services at Lipper in the United States.
As well as the double-whammy of a poor growth outlook and falling oil prices, the energy sector has been hit by a range of company-specific issues in 2012.
These include a gas leak at Total's Elgin platform in the North Sea, Argentina's expropriation of Repsol's YPF assets and a financial scandal at Chesapeake Energy.
As a result, the poor performance from many of the large-cap stocks has offset stronger performance from the mid-sized and small-cap stocks.
Investors who were beginning to return to energy equity funds after eight months of redemptions in 2011 started to pull back in March.
U.S.-registered energy equity funds and exchange-traded products attracted some $230 million of estimated net inflows in the first four months of this year, according to Lipper, compared with net outflows of $2.2 billion in 2011.
But the bulk of the 2012 inflows came in the first two months of the year following a change in investor sentiment due to more positive economic data from the United States and China at the turn of the year.
This raised hopes for a global economic recovery and encouraged investors to take on more risk, raising their exposure to the more cyclical commodities and growth-sensitive equity sectors such as energy.
But investors made net redemptions of some $680 million from energy funds in March and April as the economic recovery started to stutter.
Although Brent crude oil futures ended 2011 up 13.3 percent and U.S. crude up 8.2 percent, investors were deterred by the volatility and the fact that the outlook for demand remained subdued.
Futures traders pushed oil prices up on worries about supply shortages and fears that Middle East tensions would spread to leading oil exporter Saudi Arabia, but a poor economic backdrop meant mainstream equity investors shunned riskier assets.
"People have been avoiding equities. Money has been going into fixed income funds," said Roseen. "They got burned so badly in 2008 that they avoiding equities. So even though we are seeing profitability in some of these energy stocks, people just aren't buying."
Roseen also pointed to the weakness in U.S. natural gas prices, driven by plentiful shale gas production and a mild winter in the United States, which has weighed on heating oil prices and proved a drag on U.S. gas producer shares.
He also highlighted the oversupply of solar panel photovoltaic modules, which hit the renewable energy sector.
"Solar was the pariah - some of these ETPs were down 73 percent," Roseen said. "There are too many producers pushing out these modules. China has been flooding the market with this technology."
But Roseen said that better-than-expected oil company earnings on the back of last year's high oil prices had delivered stronger performance for a few energy funds in the year to date.