“Investors are coming to the conclusion that small-caps are probably at their zenith right now,” Tjornehoj said. Large-cap stocks and the funds that invest in them are often regarded as defensive because such companies tend to have international operations that can perhaps better withstand economic changes and can get by on thinner profit margins. Investors did seek some defensive positions during the period. The quarter saw a broad sell-off on Feb. 27 that began with a drop of nearly 9 percent in the often-volatile Shanghai Composite Index. The global rush of sell orders that day shaved more than 3 percent off the major U.S. stock indexes. Though stocks eventually made up much of the lost ground, volatility returned after keeping a low profile for much of the second half of 2006 and into the first part of 2007. “Volatility reared its ugly head,” said Brett Hammond, managing director and chief investment strategist at TIAA-CREF, a financial services organization that managed more than $406 billion at the end of 2006. “We had quite a long period of relative calm. Some bumps and grinds around the world began to make people feel they needed to do some repricing of risk. “I don’t think it was a change in fundamentals. I think perceptions changed.”160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! In any case, the pace of Wall Street’s advance slowed markedly from the fourth quarter, when diversified equity funds produced an average return of 12.9 percent. “Over all, it was a decent quarter,” said Lipper analyst Jeff Tjornehoj. “We certainly had a lot of momentum at the beginning of the year, and that dropped precipitously at the end of February with problems in China. Since then it’s been rather sideways,” he said. Investors who didn’t rush to perceived safety in large capitalization funds did better in midcap and small-cap funds. Multicap funds showed returns of about 4.3 percent to 4.4 percent, depending on whether they targeted faster-growing companies or those more established companies that might pay dividends. Small-cap funds saw gains of about 2.5 percent to 3 percent. But large-cap growth funds showed 1.02 percent return and large-cap value funds turned in 1.01 percent. In years past, small-cap funds had often showed stronger returns than large-cap and midcap funds. NEW YORK – Mutual fund investors who avoided panic when volatility strode back onto Wall Street in recent months managed decent if decidedly smaller returns for the first quarter. Returns from mutual funds concentrated in natural resources stocks and utilities far outpaced those in other areas, but most mutual fund classes showed gains for the quarter. Financial services funds and funds that bet stocks would fall, known as short-bias funds, were laggards. The 7,977 U.S. diversified stock funds tracked by Lipper Inc. showed an average preliminary return of 2.1 percent for the three months ended Thursday. The final trading session of the quarter was Friday, when major stock indexes were little changed. Collectively, the funds’ assets rose to $3.82 trillion from $3.74 trillion at the end of 2006. By comparison, the Standard & Poor’s 500 index rose 0.18 percent during the first quarter. The S&P 500 total return index, a preferred measure by the industry because it includes dividend appreciation, was 0.64 percent. The Dow Jones industrial average, made up of 30 blue chip stocks, fell 0.87 percent for the quarter.