Classic Growth Stocks Are Leading This Market Rally THE strong first quarter for equity mutual funds - up 12 percent - is reminiscent of their hot start last year, just before stocks ran headlong into a major pullback in the spring and summer. But upon closer examination, there is at least one major difference. Last year, funds that invested in defensive-minded, income-producing stocks - like health care and utilities shares - were among the best performers, signaling that investors were still wary about the strength of the economic recovery. Today, "you're starting to see some of the more economically sensitive areas do well," said David Hollond, co-manager of the American Century All Cap Growth fund, which posted gains of 18.7 percent for the quarter, far ahead of the broad market. The shift to classic growth areas of the market, like technology and consumer stocks, may be a sign that at least some investors are becoming more confident in the economy, and that could make the markets more resilient than they were last spring, money managers say. This confidence stems from growing evidence that two headwinds that have impeded this recovery so far - weakness in employment and housing - are finally starting to improve. Larry J. Puglia, manager of the T. Rowe Price Blue Chip Growth fund, added that fears about the European financial crisis had also begun to subside. "Investors have gotten more comfortable with some of the solutions being put in place to try to bring about improvements in the European sovereign debt crisis," said Mr. Puglia, whose fund has returned 14 percent over the 12 months through March, beating more than 90 percent of its peers. It's no surprise, then, that some market areas that have been battered in recent years but that do well when the economy recovers - like home-builder and financial services stocks - also heated up in the quarter. The home-building sector in the Standard & Poor's 500-stock index soared more than 31 percent in the quarter, while financial stocks, on average, gained more than 21 percent. Over all, the Russell 1000 Growth index, made up of fast-growing blue-chip stocks, posted gains of 14.7 percent in the quarter, around two percentage points better than the broad market. Within that index, stocks with fast-growing earnings have generally performed best so far this year, said Robert E. Turner, chairman of Turner Investment Partners. He noted that if the Russell 1000 Growth index were broken into four groups based on earnings growth rates, companies in the fastest-growing group would be up nearly 23 percent from the start of the year through March 27. The slowest growers in the index gained 8 percent. What does this show? After a period when investors focused primarily on macro trends like the strength of the global economy, "investors are finally focusing on company fundamentals again," Mr. Turner said. When you stop and think about it, maybe this is the first stage of a market that's getting better for the long term. To be sure, this doesn't mean that the market is in store for a period of explosive growth. Mr. Turner points out that, historically, "growth stocks do well when there's moderate growth, not when we're in a boom or bust." Still, investors will have to be more discerning when it comes to selecting stocks, said Tim Cunningham, co-manager of the Thornburg Core Growth fund. "You're not going to see whole groups of stocks moving together like before," he said. For instance, more than 8 percent of Thornburg Core Growth is invested in financial services, a sector that hasn't fully recovered from the financial crisis that struck in 2008. Yet Mr. Cunningham noted that the fund still doesn't own large, traditional banks. Instead, Core Growth - up 18.5 percent in the last quarter - owns more specialized financial players like SVB Financial Group and Visa. SVB doesn't do any mortgage business, instead lending to tech and biotech companies in Silicon Valley, including many early-stage players. So it's as much a tech play as anything. As a global credit card processing giant, Visa stands to benefit if the economy picks up and consumers ring up more charges, Mr. Cunningham said. Should the economy take another turn for the worse, though, Visa would be shielded from a good deal of fallout because it assumes no credit risk - that falls to the banks that issue cards within the Visa network, he added. That could be an important protection because of the uncertainties that remain in the economy, including rising gasoline prices that threaten consumer wallets, growth fund managers say. Jeffrey S. Van Harte, who heads up Delaware Investments" growth stock team, added that gasoline prices weren't the only threat. He said that because of all the uncertainties surrounding government actions in the United States, Europe, China and the Middle East, it is way too soon to assume that economic headwinds are dying down. "You're seeing less of it at the moment," he said, "but macro factors do loom large." As a result, he said, "you want to own companies that control their own destiny." Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.