Most mutual fund investors use one of three strategies: active management, passive management, or some combination of the two.

Investors who favor passive management typically hold a lineup of index funds in their portfolios and rely on diversification across a variety of asset classes to insulate against downturns. With savvy asset allocations, they frequently outperform the markets.

Others prefer actively managed funds, betting on the stock-picking abilities of experienced managers with proven track records.

But as anyone who has ever invested in an actively managed mutual fund knows, it’s not unusual for managers to hug their benchmark indexes–particularly after periods of underperforming or outperforming the markets. In the worst cases, these funds become little more than glorified index funds that typically fall far short of beating the markets.

One way to avoid this pitfall is to zero in on focused funds. Typically holding fewer than 50 securities in their portfolios, focused mutual funds usually consist of the manager’s 10 or 20 best ideas, eliminating the risk of that they’ll transform into index-fund lookalikes.

But concentration has its risks. When the managers’ ideas pan out, focused funds perform very well. But if a few ideas go sour, look out below. When you invest in focused funds, you should have a high level of confidence in the management and be willing to stick with them unless they’ve clearly lost their way.

Here are our three favorite focused funds, those in which we have the utmost confidence. These managers have proven their mettle year after year in both up and down markets.

Large-cap value fund Yacktman (YACKX) managed to eke out impressive returns between 2000 and 2002–the aftermath of the burst tech bubble–handily outperforming the S&P 500 as well as the majority of its peers, many of which were caught up in the bull-market fervor.

Although the fund finished 2008 with a 25.8 percent loss, this performance compared favorably with the broader market and placed it in the top 2 percent of its category.

And there’s a story behind this loss. Don and Stephen Yacktman amassed a sizable cash position between 2003 and 2007, citing a lack of attractive opportunities amid an overvalued and risky market. This trademark conservatism dragged on returns at the height of the stock market bubble, but insulated the fund from the losses suffered by many of its peers over the first three quarters of 2008.

The Yacktmans leverage a unique tripartite approach to value investing, targeting companies based on three criteria: Low entry prices, solid business franchises and shareholder-oriented management teams.

In and of itself, focusing on firms with low debt that generate reliable cash flows and that reward shareholders isn’t extraordinary, but there are a few wrinkles that distinguish Yacktman’s strategy from other value-focused funds.

For one, Don and Stephen analyze stocks as one would analyze bonds, weighing the compounded rate of return against the risk associated with a particular holding; as Don puts it, “If you wanted to own a position in Coca Cola, you don’t need to demand as high a rate of return as an investment in Liberty Media.”

The twosome also tends to steer clear of companies with high fixed asset requirements and inordinate sensitivity to economic turbulence. That’s another reason why Coca Cola (NYSE: KO) has been one of the fund’s largest holdings over the past several years and accounts for 8.7 percent of its investable assets.

Common threads that run through all of the Yacktman’s investments are excellent franchises, strong balance sheets and diversified product lines that place them in a strong position to weather any financial crisis.

Although about 66.5 percent of the fund’s holdings are in large-cap stocks, the Yacktmans don’t shy away from investing in smaller firms that are off the beaten path either.

Take, for instance, longtime favorite Lancaster Colony Corp (NSDQ: LANC), a specialty foods corporation that produces Marzetti’s vegetable dip and salad dressings, among other products. The company has consistently raised its dividend from year to year, and the Yacktmans are convinced it has what it takes to perform in a difficult environment.

Third Avenue Value (TAVFX) is frequently described as a vulture fund, though that’s a bit of a mischaracterization. Manager Martin Whitman, who’s helmed the Third Avenue’s flagship fund for 19 years, devotes just a small percentage of the fund’s portfolio to distressed securities.

More typical of the fund’s portfolio, though, are solid companies that, for whatever reason, are unloved by the markets. Whitman’s investment approach is one that would make Warren Buffett or Benjamin Graham proud.

In his search for “safe and cheap” stocks, Whitman targets companies that possess certain qualities: strong balance sheets with limited leverage; capable management teams that typically own large blocks of the company; comprehensible business models; shareholder friendly regulatory environments; and shares that trade at a discount to Whitman’s estimated takeover value.

Although it’s not unusual for Third Avenue Value to underperform in the intermediate term–on a three-year annualized basis the fund has lost 5.6 percent, ranking it in the 74th percentile of the world stock category–long-term performance is where the fund shines. On a 10-year annualized basis the fund is ranked in the top 10 percent of its category. And since its inception, it’s returned better than 11.5 percent.

Those returns exhibit low correlation to both stock and bond markets as well as foreign and US indexes, making Third Avenue Value an excellent supplemental holding for a broader portfolio.