Observers predict continuing opportunities in growth funds this year.

After wandering through the desert for three years, growth investors found an oasis in the huge market rally of 2003. And this oasis was no mirage-the S&P 500 jumped 28.67%, while the S&P Midcap 400 index zoomed 35.59% and the Russell 2000 small-cap barometer soared 47.25%. Solid earnings (helped by easy comparisons and a weak dollar) and strong GDP numbers heralded an economic recovery that bolstered equities across the board.

After getting skunked during the prior three years, growth funds roared back from negative territory with a vengeance. Small-cap growth funds led the way with collective gains of 44.77%, followed by mid-cap growth (36.05%) and large-cap growth (28.44%). Such explosive returns beg the question of how much room does growth investing have to run, let alone whether the small-cap universe can maintain its scorching pace.

Of course, if we knew the answers we'd all be rich and heading off into early retirement. But the general consensus is that barring any terrorist attacks or other geopolitical events, the markets are in for a year of steady-if more subdued-growth, thanks to stimulative fiscal and monetary policies, improving corporate earnings and piddling returns for fixed-income vehicles. "A lot of the trends that started last year are continuing this year," says Reuben Gregg Brewer, Value Line's manager of mutual fund research. "The best part is that the economy is broadening a bit; it's not just the consumer who's spending."

Aided in part by rising corporate spending, Value Line analysts expect the economy to grow about 4% this year, with a long-range forecast of 3.5% to 4% over the next few years. But Brewer cautions that this won't necessarily translate into a repeat of 2003 for equities. "We think the market is fairly valued now," he says. "We think momentum will lead to an up year, but most likely it'll be near the historic norm."

After a fast start in January, the market's pause in February slowed the growth train a bit, and by month's end the growth categories trailed the value and blend categories in each of Morningstar's overall large-, mid- and small-cap groupings.

For many people, growth means having a heavy bent toward tech or other high-flying areas such as cutting-edge health care. To Richard Drake, senior managing director at the ABN Amro Growth fund, growth investing means going with companies in any sector as long as they're growing faster than the S&P 500. "We try to pick the best companies and not try to manage to what we think the market will do," he says. "That's market timing, and we're not good at that."

By relying on steady companies with consistent earnings, the fund missed out on trends and trailed its peers in such boom years as 1999 and 2003, where its 21.6% gain trailed the large-cap growth category by seven percentage points. Still, its 10-year annualized return of 12.40% puts it in the top 4% in its category.

Drake is overweight in tech, including heavyweights Cisco and Dell. He's also overweight in consumer discretionary names such as Kohl's, Harley-Davidson and Starbucks. "These have strong business models with room to grow," he says.

Fidelity Capital Appreciation fund portfolio manager Harry Lange foresees good days ahead for the large-cap growth sector. "This fund can go anywhere in capitalization range, and it now has the biggest large-cap orientation it has ever had," says Lange.

Lange's heavy bet on tech in 2003 produced a whopping year-end return of 51.7%, placing it in the top 2% among all large-cap growth funds. Compared with its best-fit index (Pacific Stock Exchange Tech 100), the fund sported a low beta of 0.65 and a high alpha of 5.37.