NEW YORK -- Wall Street's latest advance has made growth mutual funds, dismal performers in the bear market, look attractive again. That might tempt investors to delve into more aggressive investments like these, but analysts - and even some fund managers themselves - are still urging caution.
"We still have concerns about how strong earnings are going to be in the fourth quarter. And, gross domestic product estimates may be coming down," said Matt Brown, head of equity management at Wilmington Trust.
But for the past four weeks, large-cap growth funds - those that focus on the largest growth-oriented companies - have been the top performers, posting a return of 3.4 percent, according to fund tracker Lipper Inc. Meanwhile, small-cap value funds, which had outperformed large-cap growth and other fund categories over the past year, recorded a negative return of 2.1 percent.
Growth stocks powered the bull market of the late 1990s and then led Wall Street's descent into its prolonged slump. Their improvement is reflected in the performance of the Nasdaq composite index, which has a heavy representation of growth-oriented stocks and which suffered the most in the market's downturn.
Since Oct. 9, when Wall Street began to gather some upward momentum thanks to better-than-expected third-quarter earnings, the Nasdaq has posted the best performance of the three major market indicators, rising 18 percent. The Dow Jones industrials and Standard & Poor's 500 index have each advanced nearly 15 percent.
But fund managers and stock analysts are still uncertain about the path of the stock market and the pace of the economic recovery. A huge drop in consumer confidence, reported Tuesday by the Conference Board, also gave them reason to be cautious about growth stocks and funds.
"Right now, we think the economy is going to have a subdued recovery," said Bob Armknecht, portfolio manager of Fleet Asset Management's Galaxy Equity Growth Fund. "And, there are going to be no standout sections of the economy or the market."
The lack of a leading sector is why Armknect said he is sticking with a portfolio allocation that mirrors the S&P 500, rather than concentrating more on a particular sector, such as tech, on the belief that it will outperform the rest of the market.
In the future, Armknecht said, "We will alter the portfolio's holdings where we see the greatest probability of earnings growth."
Other growth fund managers are becoming more bullish. Earlier this month, Art Bonnel took his fund's cash position, which was more than 50 percent, and reinvested it in stocks.
The decision was based on several factors, including the market's recent rally and stock prices that are still at multi-year lows, said Bonnel, portfolio manager of U.S. Global Investors' Bonnel Growth Fund.
"It might be a good time for the market to have a meaningful rally," he said.
The fund is now 100 percent invested in stocks that Bonnel believes have the greatest potential for growth. His funds' holdings include hospital chain Tenet Healthcare and 99 Cents Only Stores.
Among other reasons for putting cash back into the market, Bonnel said, is that "interest rates started moving back up, which shows we won't, for now, go into a recessionary depression. Earnings are starting to look a little better. You have a better prospect of earnings next year. A lot of the corporate scandals are over with."
"It was all those things. I can't put my finger on just one," Bonnel added.
Individual mutual fund investors might not be ready to take action as dramatic as Bonnel's. But as they become more confident in the market, they can gradually increase their contributions to Individual Retirement Accounts and 401(k) plans. Financial advisers often encourage this approach, called dollar-cost averaging, saying that over time the market's gains more than compensate for its declines, yielding a respectable return of 10 percent to 12 percent.