BOSTON ( TheStreet) -- Look at most mutual funds these days and you tend to see the same names in the top holdings, whether they fit in a fund's benchmark or not.
For example, iPad and iPhone maker Apple (AAPL) is owned by almost 4,850 funds, including eight "small-cap" funds.
And with the S&P 500's gain of 11.3% this year, who wants to be left off that gravy train?But it's clear that the large-cap benchmark is being driven mostly by Apple, which with its 50% gain this year and current $614 share price, makes up 4.6% of the index. So as goes Apple, so goes the S&P 500, which should give many investors pause. "Some investors are angered by the 500's vulnerability to a Newtonian event: Apple falling to the ground, and the outsized impact that a declining stock price would have on the index," said Sam Stovall, S&P Capital IQ's chief equity strategist, in a market commentary. But there's a whole other world of investing out there in small- and mid-cap stocks where investors can outdo many of the big guys while adding diversity to their portfolios. The S&P Mid-Cap 400 Index is up 12% this year, while the small-cap bellwether Russell 2000 Index is up 9.8%. And, over the past three years, both indices have outperformed the S&P 500 by an average of 1 percentage point per year. If you're shopping for small- and mid-cap stocks to diversify your portfolio, you'd be wise to start by looking at the portfolio of the small-cap stock fund specialist Royce Funds. Its motto is: "Small company investing is our core business." Royce Funds, a family of 25 funds with $35 billion in assets under management, has an admirable track record. Its funds gained an average 11.9% in the first quarter and have a three-year average annual return of 27%. Russel Kinnel, who writes the Fund Spy column for fund tracker Morningstar, noted recently that "71% of Royce's funds are rated 4 stars by Morningstar (out of a possible five). Now that's consistent!" Not to mention pretty good. Its $3 billion small-cap blend fund, Royce Special Equity Fund (RYSEX), gets a Morningstar "gold" rating, its highest, for its steady outperformance over its peers. The fund is up 9.2% this year and boasts a 10-year average annual return of 8.4%. And in the mid-cap growth fund sector, its $7 billion Royce Premier Fund (RYPRX) also earned a gold from Morningstar. It's up 9.4% this year and over 10 years it has returned an average of 10.5% annually. So Royce's stock picks are worth a look for potential small- and mid-cap stock investors as its analysts do a lot of research to come up with its portfolio of relative unknowns. The largest holding, firm-wide, at just over 1% of its assets, is Nu-Skin Enterprises (NUS ), which makes and distributes personal care products and nutritional supplements, selling them directly or through a highly developed multi-level marketing network. In 2011, it had sales of $1.7 billion and earnings of $2.38 per share, continuing a more than six-year trend of steadily rising revenue and earnings. And its shares carry a 1.39% dividend. Another top Royce pick, Westlake Chemical (WLK - Get Report) has gained 35% this year. It's in a rather obtuse part of the chemicals industry as a producer of ethylene, polyethylene, and styrene chemicals, caustic soda and vinyls used to make fabricated PVC products, such as pipes. Goldman Sachs (GS) added the company to its "conviction buy" list at the end of February. Here are 10 Royce fund family stock picks in inverse order of their company-wide portfolio weighting:
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