(Editor's note: TheStreet today named 82 mutual funds and exchange traded funds, or ETFs, winners and runners-up in its second annual awards ceremony. A list of the funds and related articles can be found on the awards page.)



) -- When children are asked what they want to be when they grow up, they're more likely to say "firefighter" or "doctor" before "asset manager." But even as a kid, Jason Ronovech, manager of the

Paradigm Opportunity Fund

(PFOPX) - Get Report

, enjoyed the thrill of researching and picking stocks.

Ronovech, who broke into the investing business 12 years ago, says he used to participate in newspaper stock-picking contests when he was younger. Those contests rewarded those with a model portfolio and fictitious amount of money to manage, skills that have benefitted Ronovech as he now hunts for the best small-cap stocks he can buy as a professional investor.

Jason Ronovech

"I enjoyed that. I enjoyed the excitement of it," Ronovech says by phone from his office in Albany, New York. "It was interesting to do the analysis and see the results as you compete against others. It's a combination of enjoying analysis and looking at a broad number of companies and learning about them."

In 2000, Ronovech landed at Paradigm Capital, a boutique investment-management firm focused on small-cap stocks. The company is nearly two decades old with $2 billion in assets under management, the vast majority of which are with institutional and wealthy clients. Paradigm Capital launched its own mutual fund family a decade ago with the

Paradigm Value Fund

(PVFAX) - Get Report

. Ronovech is the manager of that fund as well as the

Paradigm Select Fund

(PFSLX) - Get Report

, which was started in 2005.

However, it's Paradigm Opportunity that earns a "buy" rating and a five-star grade from TheStreet Ratings, which indicates the fund has an excellent track record for maximizing performance while minimizing risk. Because of that, Paradigm Opportunity won


Best Funds 2012

award for the small-cap core category. The runner-up was

Intrepid Small-Cap Investor

(ICMAX) - Get Report

, run by Mark Travis, Jayme Wiggins and Greg Estes.

The Paradigm Opportunity fund returned an annual average of 22.3% in the three years through Dec. 31, outpacing the benchmark Russell 2000 Index's return of 15.6%. The fund has an average annualized total return of 4.3% since inception on Jan. 1, 2005, compared to a 3.2% return for the Russell 2000. A hypothetical $10,000 investment made at the fund's inception would have grown to $13,442 as of Dec. 31.

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The Opportunity Fund invests in small-cap companies by finding undervalued, out-of-favor small-cap companies with sustainable, competitive positioning in their industry and a strong ability to generate high free cash flow throughout economic cycles, Ronovech says. He also has a key focus on the operational discipline of the management team.

"We combine that compelling valuation with those qualitative fundamental factors to put together a portfolio," Ronovech says. "The focus is really on value to start and to find where the deepest values are in the market. It looks at both the company relative to market, the industry, and where the businesses have traded over market cycles."

The Paradigm Opportunity Fund is focused, with only 32 positions in the portfolio. The fund is currently overweight technology, consumer discretionary and health care relative to the Russell 2000. It is underweight a handful of sectors, including industrials. Ronovech says that when the fund is buying a position, he has a focus "on the upside potential from fair value but, just as important, the downside risk."

"As you're combing through, the focus is on quality and identifying the businesses with those characteristics," Ronovech says. "When you're buying value, you're protecting yourself from that risk a little bit, but you want to be buying a higher-quality business to protect you from operational and other business risk."

That style helped Ronovech and the fund weather a brutal 2011 for small-cap stocks. The fund finished 2011 with a return of minus 1.3% as domestic small-cap stocks were crushed during the market selloff that followed the debt-ceiling crisis and subsequent downgrade of the U.S. credit rating by Standard & Poor's. That performance bested the Russell 2000, which fell more than 4% last year.

"It's great to have numbers that are strong over the year or over a shorter time period," Ronovech says, "but our focus at the firm and for the fund is to deliver over multi-year periods for clients through very different market environments. We want to protect them to the downside and to capitalize when markets are stronger and recover."

Ronovech stayed the course and focused on the investment process that had produced positive returns over previous time periods. "There wasn't any real material changes in terms of portfolio strategy or positioning," he says. "Based on our conversations with companies through that time period and what we saw on a micro level, you weren't seeing the panic or concern that existed on the macro level. So while it was frustrating that the market and small caps were selling off, it was a compelling time as an investor to get excited and see the disconnect."

One such example of Ronovech's successful stock picking was his bet on

Men's Wearhouse


, which he purchased below book value in August 2010. Shares of the company are up nearly 50% over the past year, well outpacing the broader market as well as the Russell 2000 Index.

"You saw a little bit of a slight improvement in the economy coupled with a fashion upgrade cycle in men's wear," Ronovech says. "They made the right moves during the recession to reposition the business in a new environment. When you saw just a little bit of an improvement in demand in 2011, the sales were up substantially. They picked up market share."

Small-cap stocks have been outperforming in 2012, a sharp turnaround from 2011. After falling 4.2% in 2011, the Russell 2000 is up more than 11% this year, outpacing the S&P 500 Index of the largest U.S. companies. As such, Ronovech's fund has risen sharply, with the net asset value climbing from a low of $25.14 on Jan. 4 to a high of $27.89 set on Feb. 16.

The bounce in small caps is troubling to Ronovech, however. He notes that major structural problems, such as the European debt crisis, is still unresolved. Instead, stocks have been running higher on very accommodative central bank activity, which has provided a significant amount of liquidity and stimulus to the system. That's causing people to move back into the riskier assets like small-cap stocks.

"With that type of environment as a fundamental value investor, you get a little cautious as valuations move up substantially without any real change in the underlying fundamentals. We're certainly more keenly focused on the risk side of things."

Looking ahead, Ronovech is keen on two holdings in the Paradigm Opportunity Fund's portfolio. The first is



, a provider of components like input/output adapters that help connect server and storage networks.

"The business has grown with the server industry and QLogic is the market leader," Ronovech explains. "They have the strongest business model by far." What excited Ronovech most about the company is how QLogic has expanded its product portfolio to offer these adapters to the Ethernet market, which significantly expand its market.

"If you continue to see steady growth in the server industry as the economy recovers, QLogic should do fine," he says, "but if I'm right about the new market opportunity for them, it should kick the company up to a new level in terms of market valuation perspective."

Ronovech is also a fan of



, which operates customer management programs for a number of different companies across telecom, cable, financial-services and technology industries.

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"I like that they brought in a new CEO two years ago who really tightened the operations," Ronovech says. "In 2011, you started to see their call-center volumes accelerate, their margins expand and the earnings from that business accelerate. The CEO also divested a number of non-core assets. I believe they're going to aggressively buy back their shares and return capital to shareholders. If you see that, plus if the call center business continue to improve, the market should be willing to pay a higher price for Convergys."

1. To be eligible for consideration, an open-end mutual fund needed at least a three-year history on Dec. 31, 2011, and still be accepting new assets from retail investors; for exchange traded funds, a one-year history. 2. Half of the rating is based on performance metrics, including total return minus expenses, with a weighting to give long-term performance greater emphasis.3. The other half of the rating is based upon risk metrics, including standard deviation, size of trough-to-peak (drawdown factor), semi-standard deviation and beta. The lower the risk, the better.4. Top and runner-up funds and ETFs were selected in a variety of categories (funds and ETF were placed in categories via Lipper data).

-- Written by Robert Holmes in Boston


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.