S&P Picks 2 Top Mutual Funds Using Stovall’s Sector Strategy

"The primary point is that the Delafield and Royce funds are heavily exposed to the three sector winners of last year," Bensinger said.

The best-performing sectors are Consumer Discretionary, up 26% in 2010 versus 2009, Industrials, up 24.7%, and Materials, up 20.6%. The funds Bensinger identified, both S&P four-star funds, also are well positioned in terms of metrics such as their individual holdings, expense ratio and turnover.

Stovall said that his sector strategy stems from a book he wrote last year, "7 Rules for Wall Street," which looked at sector-based exchange traded fund portfolios. The rule that Bensinger's picks demonstrate is "Let your winners ride, but cut your losers short," a technique that indicates investors are better off buying last year's winners than buying last year's losers.

The Consumer Discretionary, Industrial and Materials were the strongest-performing sectors in 2010 in a rebound from their weak performance a year before, Stovall noted. In a bear-market bottom, investors tend to be unreasonable in their panic. Then again, investors are opportunists, so if stocks are being given away at fire-sale prices, they'll scoop them up.

"It's consistent with history that as we emerge from a bear market and a recession, those sectors that were priced to go out of business but didn't tend to do the best in the first year of a new bull market," Stovall (left) said. "Cyclical sectors do best in the first two years of a bull market. It's not too surprising to see that investors had been embracing Consumer Discretionary, Industrials and Materials. These were the best performing groups in 2010 because most economists had been projecting a very slow economic recovery. Investors have gravitated toward and stuck with the cyclical sectors, hoping that a global economic recovery will continue to have staying power."

Read Sam Stovall's asset allocation thoughts from Sept. 1, 2010 at AdvisorOne.com.

Another S&P wise person, Vaughan Scully (left), writes monthly for Investment Advisor magazine in a column called ETF Advisor; his most recent article is on overseas real estate ETFs. Through his "Fund Researcher" blog on AdvisorOne, Scully explores mutual funds and ETFs. His most recent post is on finding high-yield muni bond funds that perform better than Treasuries.