Gold, Emerging Funds Led In 1st Qtr Bonds Slipped In March Small value funds paced diversified fund categories for latest quarter, month.(MUTUAL FUNDS)

Byline: CLAIRE MENCKE

With a recovery in the U.S. starting to take hold in the first quarter of this year, more stock mutual funds regained their footing with positive returns. Now bond fund investors are looking at diminishing returns, at least on their safest investments.

It's still early in the game. Much of the rebound is still on a stock-by-stock basis. So it's no surprise that diversified stock categories have been top performers this year to date. Overall, U.S. diversified stock funds were down 0.8% in the quarter, though they were up 4% last month through March 26, accordsing to Lipper Inc. data.

Small value and small blend-style funds, which began to climb late last year with the economy in the grips of recession, stayed high in the ranks of first-quarter returns.

Small-cap value funds returned 7.5% for the first quarter and 6.5% for the latest month. Right behind them, small-cap blend funds returned 3.2% and 6.3% for the same periods.

Some small-cap stocks have made huge gains over the past month as more signs emerge that the economy is improving, says Warren Isabelle. He runs $108 million ICM Isabelle Small Cap Value Fund. It's returned 11.8% this year.

"We've had some decent moves," Isabelle said. "But the question is what stocks can do over the economic cycle." That move up is just starting. So he's encouraged that small value stocks have a way to go.