Small, mid-cap stock funds lead

New York Mutual funds that focus on small and mid-size stocks were at the top of the leader board in the first quarter.

That's a classic bet on a stronger US economy, because smaller firms tend to be more dependent on the domestic economy for their sales and earnings as opposed to blue-chip companies that operate worldwide.

Funds that own small-capitalisation value stocks shares believed to be undervalued relative to a firm's earnings or assetsrecorded a total return of 9.3 per cent, on average, according to Morningstar.

Total return includes share-price appreciation as well as any dividend income. Mid-cap value funds were up 8.1 per cent.

By contrast, the total return of the Standard & Poor's 500 index of big-company stocks was 5.4 per cent.

Market bears argue that smaller stocks' continued strength is a sign that the rally is getting frothier: Thinly traded small-cap shares are a fertile field for speculators who often run wild just as bull markets flare out. Among specific fund sectors, the top performers in the first quarter were an eclectic mix: Real estate funds, which typically own shares of real estate investment trusts, surged 9.4 per cent, on average, bringing their gain for the last 12 months to 105.3 per cent. Some investors may have been betting that the worst-case scenario for commercial real estate prices already was reflected in beaten-down REIT shares.