Stock-Market Rally to Hit Full Stride

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 UnitedHealth Group ( UNH) and Amerigroup ( AGP), which have outperformed the likes of Apple ( AAPL) and Intel ( INTC). 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. Franklin Resources' ( BEN) Templeton Global Bond Fund ( TPINX) 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:

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