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TheStreet Open House

3 Top Funds' Best Stock Picks Crush S&P 500

BOSTON ( TheStreet) -- Health-care mutual funds are up an average of 15% this year, the most of any industry, as investors piled into so-called defensive and value stocks as the global economy grinds along at a slower pace.

Of the 40 mutual funds with the highest returns this year, 27 are health- or biotechnology-focused, including the top 11 performers, according to Morningstar. Real-estate funds are a distant second, with a gain of 9.6%.

"It doesn't matter what the fund company is, because so many of the health-care sector funds are doing so well," said Todd Rosenbluth, a mutual fund industry analyst at Standard & Poor's in discussing comparative fund performances with TheStreet.

The reason for their strong returns is that, excluding dividends, health-care stocks have gained 12.8% this year through May 25, more than double the return of the S&P 500 Index, and that comes after a pedestrian 3.2% return for the sector for all of 2010.

Health care is considered a defensive play in the face of market uncertainties, but it underperformed last year as concerns grew over how government-proposed health-care reforms would affect companies' earnings. But many of those issues have been resolved this year as many firms have said they find most of the proposals manageable.

The best performer this year is the Fidelity Select Medical Delivery Fund (FSHCX), with a 20.4% increase, followed by the ProFunds UltraSector Health Care Fund (HCPIX), at 20.3%.

But some investors are cashing out, apparently in the belief that the funds may have topped. U.S. health-care funds have seen outflows of about 7% of assets in the first four-and-a-half months of this year, Rosenbluth said.

Fund flows tracker EPFR Global said "profit-taking appears to have been the driver" as the funds have gained over 14% since mid-March. It said institutional investors' redemptions in health-care and biotechnology funds hit their highest weekly total in over a decade in the week ending May 25.

There also appears to be a shift by investors to more defensive stocks over the past month, as the returns of funds in the consumer staples, utilities and telecommunications sectors are picking up steam, Rosenbluth noted.

It's a turnaround from earlier this year when energy stocks and, by proxy, energy funds, ruled. Energy stocks are down 6.3% on average this month, while another strong performer in the first quarter, the materials sector, is down 5.1%.

The benchmark S&P 500 Index, including reinvested dividends, is up 6.2% this year and 26.6% over the past 12 months.

Here are three mutual funds that are among the top performers this year and their best portfolio picks:

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