BOSTON (TheStreet) -- Spurred by a two-year bull market, investors poured $109 billion into mutual funds this year through April, including $28 billion into U.S. stock funds.
Shares benefiting the most are last year's laggards, health-care companies, including
( AGP) and
( AGP), which have outperformed the likes of
.UnitedHealth is up 40% this year, and Amerigroup 57%.
The shift in sentiment among investors is startling, given equity funds had suffered outflows for two years, including $75 billion in 2010 alone.
Investors are more confident as the economy has stabilized, the job market is growing and companies are reporting outsized profits. That's a dramatic change from two years ago, when falling stocks cut in half many Americans' 401(k) portfolios, unemployment was on its way to topping 10% and corporate losses piled up.
Underscoring that trend, the S&P 500 Index rose 7.7% this year through May 9 and 24% over 12 months. The benchmark for U.S. stocks gained 15% in 2010.
Even as stock funds swell, taxable bond funds are the largest recipients of investors' money, taking in $57 billion so far this year, after a $217 billion increase in 2010.
Templeton Global Bond Fund
led all funds in inflows in March, at $1.9 billion, Standard & Poor's said. The mutual fund controls assets valued at $58 billion.
Small-cap funds, supported by the Federal Reserve's quantitative-easing stimulus, have had a strong run into this year, gaining 10% in the first quarter. Investors plowed $800 million into small-cap funds during the quarter.
In contrast, investors liquidated money market funds, which had $71 billion in outflows in the first quarter, and municipal bond funds, down $25 billion this year through April, as low interest rates and concerns over municipalities' credit worthiness throttle returns.
Todd Rosenbluth, a mutual fund industry analyst at Standard & Poor's, said "the fixed income and U.S. equities we cover were up about 18% in 2010, a pretty good year and that's after a good year in 2009. And the average bond fund was up 8.2% (in 2010), so it was a good year for bonds, too.
"So we think a lot of investors saw that performance (from 2010) and they decided they would be better off in equities, and money started flowing," he said.
Simon Ringrose, a fund industry analyst at EPFR Global, a Cambridge, Mass.-based fund-data firm, said investors have been steadily adding money to mutual funds since March 2009. But "it's painful to see how late" retail investors reacted as they missed out on much of the markets' gain of the past two years.
In terms of industry returns, there has been an abrupt change this year. The energy sector, which includes oil stocks, and the commodities sector, which includes precious metals, dominated the top mutual funds' returns list through the first quarter. But over the past three months, health-care stocks jumped into the lead and are showing a 13% gain this year through May 9, including 10% over the past three months, according to Fidelity Investments.
As a result, health-care mutual funds are the leaders in a Morningstar ranking. Almost half of the 40 top-performing funds have the words "health care" or "biotechnology" in their titles.
Jeff Loo, a health-care industry analyst at Standard & Poor's, told TheStreet that health-care stocks and funds suffered in 2010 due to an "overhang" from uncertainties over the government's proposed reforms. Those stocks returned a paltry 3.2% last year, sending valuations well below historical averages.
But that has made them a relative bargain. As those concerns have abated, investors are more confident in the outlook for the group this year, which is reflected in the sector's share price run-up, Loo said.
"There's still some uncertainty, with lawsuits still pending, but investors have gotten relatively comfortable with different aspects of the reform and how these companies are going to handle it," Loo said.
Here are three top-performing mutual funds this year, with a look at their best picks:
The $768 million
Fidelity Select Medical Delivery Fund
leads all equity funds with a 24% return this year through May 9, according to a Morningstar ranking. It has a 39% return over the past 12 months, but it should be noted that the fund lost 44% of its value in 2008 when the stock market collapsed.
Select Medical Delivery's volatility is due to its narrow agenda: Managers may invest only in health insurers, hospitals and other health-services providers. The fund, which comprises 64 holdings, has been managed by Andrew Hatem since February 2009.
Medco Health Solutions
, the nation's largest pharmacy-benefits manager through its mail-order pharmacy and network of retail pharmacies, is the fund's largest holding at 10%. Medco's shares are up 4.9% this year.
, at 8.9% of the fund's assets, is the No. 2 position. The company competes directly with Medco.
( AGP) makes up 7% of Select Medical Delivery. The company's stock is up 40% this year. UnitedHealth, with 77 million subscribers, offers risk-based health insurance, non-risk-based plan management for self-insured employers, Medicare and Medicaid plans, pharmacy benefits and database and consulting services. Its subsidiaries include UnitedHealthcare, OptumHealth and OptumRx.
One of the hottest performers for the fund is
( HS), up 65% this year. The company is a Medicare-focused managed-care organization that provides health benefits to 162,000 subscribers throughout Tennessee, Texas, Alabama, Florida, Illinois and Mississippi.
Janus Triton Fund
, with $2 billion in assets, is a value-conscious, small-cap fund that has had strong investors inflows this year. The fund holds 90 stocks, but only 26% of assets are in the top 10 positions, meaning it's hugely diverse.
Janus Triton has returned 12% this year and 36% over the past 12 months. The average annual three-year return is 13%. A Morningstar analyst says the fund's average annual gain of 11% since managers Chad Mead and Brian Schaub took over in July 2006 is more than three times that of rivals. "What's more, the fund has tended to lose less than most peers in downdrafts," Morningstar writes.
The fund's top stock holding, at 2%, is
, a printing firm based in Hamilton, Bermuda, that targets its services to small businesses. The company uses 22 local Web sites and proprietary software to aggregate similar customer orders to achieve scale. VistaPrint's shares have jumped 17% this year. Janus Capital Management, a family of mutual funds, owns just over 10% of its shares, more than double that of the next largest investor.
Another top pick is
World Fuel Services
, which sells aviation- and marine-fuel services to passenger, cargo and charter airlines, as well as corporate customers and the U.S. military. The company also extends credit and provides worldwide single-supplier aviation fuel, flight plans, weather reports and related services.
World Fuel Services garners three "buy" ratings and two "outperforms" from the five analysts who follow it, according to FactSet. The company has a market value of $2.4 billion, making it a small-cap, and its shares are up 0.2% this year and 31% over the past 12 months. It is the fund's fourth-largest stock holding at 1.9%.
Ritchie Bros. Auctioneers
, with $3 billion in market value, is the fund's second-biggest stock holding, at 2%. The Canadian firm, up 20% this year, is the world's largest auctioneer of industrial and agricultural equipment, with more than 110 locations in 25 countries. Morningstar analysts say "we think Ritchie Bros. Auctioneers will deliver impressive results over the next decade regardless of the strength of any economic recovery."
Another fund seeing big investor inflows this year is the $8 billion
T. Rowe Price Small-Cap Stock Fund
. It has a huge portfolio of 311 stocks with only 17% of its assets in the top 10 holdings.
The fund gained 32.5% last year and is off to a good start to this year, up 11%.
Morningstar says "the fund does own some aggressive-growth companies, (but) generally sticks with a growth-at-a-reasonable-price strategy, preferring to buy when stocks are out of favor and sell when their valuations run up."
Standard & Poor's has a five-star rating on T. Rowe Price Small-Cap Stock Fund, its highest.
The fund's top pick is
, at 1.3%. It's up 22% this year. The company is a recreational-equipment conglomerate, and brands include Mercury and Mariner outboard engines and Sea Ray, Boston Whaler and Bayliner boats. It is also the leading manufacturer of fitness equipment, under the Life Fitness and Hammer Strength brands.
The fund's second-biggest stock holding, at 1.2% of the portfolio, is
, which has an odd mix of a line of lighting products and specialty chemicals. It returned 63% last year and is up 13% this year, giving it a market value of $2.5 billion.
Fidelity owns 9.7% of its shares, followed by T. Rowe Price, at 7%.
The fund's fourth-largest holding, at just over 1%, is
( AGP), which has a return of 57% this year. It is a Medicaid-focused managed-care organization that provides health benefits to 1.9 million subscribers via contracts with 11 states, including Texas, Florida, Georgia, Tennessee, Maryland, New York and New Jersey.
Fidelity owns 10.3% of its shares, followed by T. Rowe Price, at 9.8%.
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