A Look at Mutual Funds Over the Last Three Months

While we would never make a recommendation based on such a short time period, it does pay to study quarterly performance to try to determine why funds like the Van Eck one did well — a few stocks increased more than 30% — while others like the iShares product faltered. (Chalk that up to concerns over a slowing housing market.) The idea is not to make knee-jerk decisions about one hot fund or another. Rather, you want to spot investing trends early, so you can reposition your portfolio before things get out of whack. So in this week's column we'll take a quick look back at 2007's first three months.

And what a quarter it was. On Feb. 27 China's stock market — a favorite among many aggressive investors — saw 800 companies drop 10%. That news, along with some spotty economic data here in the U.S., triggered a global domino effect. By the end of the day, the U.S. stock market had shaved 416 points. However, it has recovered a bit since then thanks, in part, to the Federal Reserve's decision to keep interest rates steady at 5.25% and is now up 1.6% year-to-date after being down as much as 6%. Figuring out what it meant it all meant was tough. While some managers viewed this correction as a sign that it was time to reduce risk, others considered it an opportunity. "When you see a drop that like occur you have to ask yourself if it is a buying opportunity or a signal to sell," says Scott Kays, the founder of his own investment firm in Atlanta. "The conditions for a big downturn aren't in place. We are buying."

After all the ups and downs smoothed out, it was stodgy old utility funds that turned out to be the big winners. Investors favored utility stocks for their dividends and their ability to perform well in flat markets. The fund group returned 6.7%. When it came to broader categories, medium-size-company funds were the place to be. Midcaps have become common ground for investors who have pulled out of fully valued small-company stocks but still want the growth that large caps haven't been providing. Midcaps returned 5.4% in the first quarter.

Of bigger note, though, was the 2.4% return large-growth stock funds posted, almost a percentage point better than their value counterparts. That's a significant occurrence. Growth stocks have lagged for several years. But Jeff Kleintop, chief investment strategist at PNC, is predicting the earnings of the S&P 500 will slow to single digits this year. In that kind of an environment investors typically clamor for stocks that still offer a chance to beat the broad market. It could "push market leadership from value to growth stocks," says Kleintop. Indeed, as we mentioned last December it may be time to up your exposure to a decent growth stock fund. Click here for our top picks.

One of the more surprising stats coming out of the first quarter centered on Magellan (FMAGX), the storied $43 billion flagship fund at Fidelity. Manager Harry Lange has been struggling to return this ailing fund to its glory days when it continuously beat the broad market. Year-to-date through March 22, the fund returned 3.25%. Out of the largest 25 funds, only four were able to top Magellan's performance. Not to jinx him, but it looks like 2007 could be Lange's year. Dodge & Cox International Stock (DODFX) was the best-performing big fund with a 5% return over the last three months.

What does all that boil down to? The market experiences ups and downs all the time, but to many advisors this recent shakeup was different. Some scooped up shares on the dip. But to most it seems to have signaled that it's time to reduce risk. Indeed, for almost two years, investors enjoyed the market's nice steady climb with little volatility mixed in. Billions of dollars flowed into risky stocks in emerging markets in Asia and Latin America. February changed all that. Advisors have begun to trim their more speculative foreign market and small-company positions in favor of large blue-chip stocks both here and abroad. You should take some profits, too.

"The rise basically sifted all the fear out of the market. Investors bought as much risk as they could," says Joe Theissen, senior investment analyst at GV Financial in Atlanta. "But I think managers were shocked that it could fall so quickly. There has been a reassessment of risk that has reverberated across the globe."