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.

Ron Pearson, a financial planner in Virginia Beach, Va., says that makes selecting the best funds more difficult. "I like small-cap and micro-cap funds," he says. "Unfortunately, they keep slamming the door closed on me. Unlike other asset categories where I can pick funds I like and stay with them, I have to keep looking for new places to put money for my clients."

Since May of last year, 26 small- or micro-cap mutual funds have closed their coffers to new investors, and six funds in the Wasatch family have stopped accepting any new money. Mutual fund tracker Lipper says there are still some 496 small-cap core funds, 457 small-cap growth funds and 205 small-cap value funds that remain open to investors. One of the top-performing small-cap growth funds, the

Wasatch Small Cap Growth Fund

(WAAEX), closed to all new money in September, and that leads some planners and analysts to say that even if the rally goes on, the opportunities may have rolled past.

On a total return basis, the Russell 2000, a benchmark index for small-caps, is up 5.28% for the year to date. It surged 64.41% in 2003 and it has a five-year total return of 9.79%, according to its Web site. On the same basis, the

S&P 500

is up 3.25% for the year to date, but lags well behind the Russell with a 12-month return of 38.53% and a five-year return of 0.12%.

Because there are more than 5,500 small-cap stocks, good managers can still find upside, but that's getting tougher, according to Kerry O'Boyle, a mutual fund analyst at Morningstar.

"We're trying to make people aware that small-caps have had a really good run and it's not likely to last too much longer," he says. "It's a good time to rebalance if your small-cap funds have gained a lot. It's not time to ditch your small-caps, but it's not a good time to dive in with too many assets into that group with such a big run-up."

O'Boyle says the widely held notion that small-cap stocks behave cyclically may have some merit. Coming out of a recession, smaller companies show more dramatic earnings growth and faster appreciation in their share prices. But if the current rally isn't as deep as the bulls think, and investors grow wary, those same companies will be the first to take a hit.

"If there was any sort of pullback, small-caps might be beat up pretty hard," O'Boyle says.

But confident managers aren't shying away from their preferred strategies.Mary Lisanti, who just launched the

Adams Harkness Small Cap Growth Fund

, says there's still ample room for finding an upside.

"Small-cap cycles tend to be long," she says. "This cycle has been led by financials, and this kind of disparity generally doesn't last. It's been led by financials because the


has lowered interest rates so many time in the last few years. Now you're getting a broader-based rally."

While she declines to discuss individual stocks in the small-cap arena and says it's dangerous to make too many generalizations about a universe of 5,500 companies, Lisanti believes that small-cap tech stocks valuations "are a little rich," though some niche players, particularly in software and chip manufacturing, are good buys.

"Forecasting small companies' growth rates is more of a black art than a science," she says.

And that art -- witchcraft or not -- doesn't come cheap.

Expense ratios for actively managed funds are relatively high, with some charging as much as 2.5% per year and others settling around 1.7%.

But Robert Pagliarini, a financial planner in the Los Angeles area, says that small-cap funds are one area where the manager makes all the difference.

Because large-cap funds invest in many of the same stocks, it's the small-cap, often bottom-up research efforts that can find an unexpected upside.

"It's hard for large-cap funds to beat their benchmarks, especially after fees," he says. "When there are fewer analysts covering smaller companies, we like an active approach" that can still make an investor money beyond conventional benchmarks. "Any time you're dealing with an active manager, you've got to pay his salary."

Taking a value approach, Pagliarini likes to allocate 10% of his clients' portfolios to the

Third Avenue Small Cap Value Fund

(TASCX). Already up 4.43% this year, the no-load fund has a 1.17% expense ratio.

Pearson, the Virginia Beach financial adviser, isn't averse to upping a client's small-cap allocation to as much as 20%, particularly coming out of a recession.

He says micro-cap stocks remain a favorite, even if some of his favorite funds are closed and finding new ones for his clients is a tougher task as the small- and micro-cap buzz keeps going. "That's causing me to stay on my toes," he said.