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Blue-Chip Funds May Gain This Quarter

NEW YORK (TheStreet) -- The stock and bond markets were kind to mutual-fund investors during the first quarter.

With the S&P 500 returning 5.4%, nearly every category tracked by Morningstar delivered solid results. Small value funds rose 9.3%, while financial funds climbed 8.3%. Most bond funds also shined. Intermediate-term funds gained 2.4%, outdoing the Barclays Aggregate bond index, which returned 1.8%.

The outlook remains promising. Stocks have been rising since early March of last year, and the typical bull market lasts at least three years, says Allen Sinai, chief global economist of Decision Economics. So there is good reason to expect a continuing rise. The picture seems particularly bright because corporate earnings have been climbing this year.

Which funds seem most attractive? To profit from an improving economy, consider large-growth funds. Those have lagged the markets lately, returning only 4.4% in the first quarter. Now many blue chips sell for discounts to the market.

For a relatively steady large-growth fund, try Janus Fund (JDGAX), which has lost 1.8% annually for the past three years, outpacing the S&P 500 by 2 percentage points. Janus aims to find moderately priced stocks that can grow consistently for years. "Our top holdings tend to be among the most predictable growth companies that you can find," says Dan Riff, a co-manager of the fund.

A big Janus holding is International Business Machines (IBM). The shares sell for a price-to-earnings ratio of 12.9, compared with 14.8 for the S&P 500. The company should grow steadily as sales increase in India and other emerging markets, Riff says. Another Janus holding is Emerson Electric (EMR), a maker of motors and factory automation. The company has sharply cut costs and is expanding around the world.

A zippier large-growth fund is Counterpoint Select (CPFSX), which has lost 0.4% annually during the past three years, exceeding the S&P 500 by 4 percentage points. Manager Karl Mills looks for unloved growth companies with solid balance sheets. When Mills finds tempting stocks, he takes big positions. Lately Counterpoint has been overweighting technology companies. "As the economy improves, companies will begin spending again, and the first place they will put money is into technology," Mills says.

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