Small-Cap Funds Max Out

Owners of small-cap funds have learned over time that their fortunes sometimes bob on stormy seas, but investors still willing to take the ride may find that the best outfitted ships have already sailed.

Regardless of whether the strong returns posted by actively managed small-cap mutual funds are going to continue, funds that invest exclusively in companies with market capitalizations of less than $500 million are starting to see limits to their upside.

Because smaller companies have fewer shares in circulation, small-cap funds are limited in the amount of stock they can own. Such funds generally thrive because they are nimble and can move in and out of a manager's best picks. Very few small-cap funds grow beyond $1 billion or more, and often close to new money if they get too big. ...