Last issue I highlighted several focused funds that allocate their assets across a compact portfolio consisting of 20 to 50 names. Such an approach ostensibly separates the wheat from the chaff by only putting money behind management’s best ideas.

This month we shift gears slightly and look at smaller funds that lack the higher profiles and huge asset bases that characterize the big shops’ offerings, but still manage to outperform thanks to rigorous research and their managers’ stock-picking acumen.

For most people names such as T. Rowe Price, American Century and Fidelity are synonymous with quality. Many investors naively associate size with success or stability and, in many cases, worry that small-fund shops are fly-by-night operations that could disappear–along with their investment. Many also believe that the best fund managers gravitate toward the biggest shops and attract substantial inflows. But if you dig into the complete lineup of offerings at any big fund shop you’ll likely fund more than a few dogs.

But small funds offer certain advantages, one of which is the smaller asset base itself. As funds accumulate assets it can be extremely difficult to move in and out of positions without moving the market, something that’s anathema to mutual fund managers. A manager’s goal is to buy low and sell high, but if each incremental purchase drives up the prices of targeted shares, overall returns suffer.

That effect is somewhat muted for funds that focus on large-cap and mid-cap stocks, but it’s a challenge that many small-cap funds face when their asset bases grow. In fact, funds with huge asset bases are prone to becoming little more than index funds, as they simply aren’t nimble enough to move in and out of positions on the fly.

Another major plus for small funds is that their managers have much more time to dedicate to what they do best–managing your money. Managers at the largest fund families often oversee multiple funds and are sometimes pressured into launching new offerings. And promoting the funds isn’t solely the province of the marketing department; managers go on media tours, appear on business television and give interviews to a host of print publications–including this one. These obligations aren’t necessarily a bad thing, but they can become a distraction.

And you’ll find many top-shelf managers at smaller fund families. In this month’s feature interview we sat down with John Rogers, CEO and Chief Investment Officer of Ariel Funds, and Timothy Fidler, co-manager of the $37-million Ariel Focus (ARFFX) expert guidance has propelled the fund into the upper quartile of Morningstar’s large-cap value category.

This month’s featured growth fund is Akre Focus (AKREX), a new offering launched by Charles Akre, formerly the longtime manager of the top-performing FBR Focus (FBRRX).

Given its manager’s sterling reputation and track record, Akre Focus is rapidly accumulating assets and won’t qualify as a small fund much longer, but it reinforces the point that funds aren’t necessarily small because of a lack of talent.

There are good reasons for a fund’s asset base to be on the low side; Charles Akre, for example, values the flexibility afforded by striking out on his own. In other cases managers may instead choose to devote their time and resources to running a single fund instead of campaigning for fresh inflows. Sometimes a manager has an approach that, for whatever reason, doesn’t appeal to the largest fund families. But just because an investment style isn’t marketable doesn’t mean it doesn’t work.

That’s not to suggest that you should base your investment decisions solely on a fund’s asset size; there are just as many bad small funds as there are bad big funds. Expenses in particular are a major concern with smaller funds. In many cases you’ll find small fund shops offer lower fees because they don’t support bloated marketing budgets, but in others you’ll find higher-than-average expenses. Mutual funds make their money by collecting management fees based on a percentage of assets, so on occasion they have to charge more simply to generate enough income to stay in business.

Always look for funds that feature low expenses and experienced management with a solid long-term track record. And always make sure you understand how the manager is investing your money.

“Small Shop Favorites” lists seven of my favorite small fry, all of which have asset bases under $100 million and most of which are under $50 million. Although these recommendations focus on a variety of asset classes each fund enumerated in this table boasts an excellent long-term track record and capable management.

Don’t buy a mutual fund just because it’s small, but don’t summarily dismiss smaller funds. Know your investment objective and keep an open mind. Remember, opportunity comes in a variety of packages.