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3 Mutual Funds for an Improving Economy

Stocks in this article: PTSGX PARSX CAAPX

NEW YORK ( TheStreet) -- Investors have become optimistic about the economy. As a result, this year's best-performing mutual funds have included cyclical mutual funds that get a big boost when the outlook for growth improves.

Top mutual fund categories include technology, which has returned 16.0% in 2012, and financial, with a return of 13.1%, according to Morningstar. In comparison, the S&P 500 has gained 9.3%. Utilities funds -- which don't gain much from economic booms -- have only returned 0.8%.

This year's showing represents a big turnaround from the performance of last year when investors feared that the economy was headed for a recession. For protection, investors poured into utilities, while technology and financial funds suffered sizable losses in 2011.

If the economy continues growing, the current market leaders are likely to maintain their momentum. So bullish investors should consider emphasizing mutual funds that have big stakes in cyclical sectors.

To find mutual funds that seem poised to do well when markets are rising, I looked for portfolio managers with strong long-term records and big positions in cyclicals.

For some extra oomph, I also searched for mutual funds that tend to rise hard when stocks climb. Such bull-market stars score high on a measure known as upside capture ratio, which is calculated by Morningstar and other data suppliers.

If the S&P 500 rises 10%, a fund that climbs 11% is said to have an upside capture ratio of 110%. Funds with high upside capture ratios can be risky, but they can produce rich rewards in strong markets.

Funds that made the cut included Ariel Appreciation (CAAPX), Parnassus Small-Cap (PARSX) and Touchstone Sands Capital Select Growth (PTSGX).

Touchstone, a high-octane choice, has returned 17.3% this year, outdoing 97% of competitors in the large growth category. The fund has an upside capture ratio of 127%.

During the past five years, Touchstone has returned 9.1%, outdoing 98% of competitors. The portfolio managers achieved the compelling record by focusing on leading companies that can continue growing for years to come. To buy champion businesses, the fund is willing to pay high prices.

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