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Editor's note: This is the second installment of a weekly series, Five Funds, which offers solid mutual fund picks in a specific category. This week's focus: Small-cap value.

If you're looking for a solid small-cap value fund, that's easy. It's finding ones still open that can get tricky.

Small-cap value offerings -- which, as their name suggests, focus on companies with a market capitalization between $500 million and $1.5 billion that look undervalued -- declined 10.3% on average during 2002. In the abysmal 2002 year just passed, that was enough to rank small-cap value funds as the best-performing equity mutual-fund category, according to Lipper -- excluding short funds, natch.

Their relative success in 2002, coming after outperformance in 2000 and 2001, led many investors to pour money into the fund category. Since small-cap funds often close once they reach about $1 billion or so in assets (a rule of thumb, not written in stone), more than 40 small-cap funds shut their doors to new investment money in 2002, according to Morningstar.

As we hunt for the best small-cap value funds in fundland for this week's

Five Funds

, the bad news is that several top-shelf ones are closed to new investment. Among them are

(PRSVX) - Get T. Rowe Price Small Cap Value Fd Report

T. Rowe Price Small-Cap Value and

(ACSCX) - Get American Century Sm Cap Val A Report

American Century Small-Cap Value. The good news is there are still several great ones open.

The five funds we profile are worth your hard-earned dollars. Every fund included has long-term returns that leave their small-cap value competition in the dust; managers who have been at the helm for five years or more; and an expense ratio that comes in below the category's 1.55% average. Also, they have no loads -- or additional upfront or back-end fees.

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But first, a quick word on the role of small-cap value funds in your portfolio. Small-cap stocks or funds serve as a useful diversifier in your portfolio to large-cap funds or

S&P 500

index funds -- a nice dose of small-caps during the past three years would have offset the dreadful performance of large-cap stocks. Typically, financial planners recommended that small-cap stocks or funds make up about 10% to 15% of your portfolio. You should split that amount between value and growth offerings.

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TheStreet Recommends

1. (ARGFX) - Get Ariel Fund Inv Report Ariel Fund

You don't have to dig deep to understand the investment philosophy of the $1.19 billion-in-assets Ariel Fund. The firm's trademark is a turtle, its motto is "Slow and Steady Wins the Race" and its Web site includes a link to Aesop's

Tortoise and the Hare

fable. For investors in Ariel, the story has been more fairy-tale than fable: The fund's one-, three-, five- and 10-year returns are all better than the industry average.

Ariel's five-year average annual return for the period ended Jan. 15 is 8.17%, placing it in the top 10% of its small-cap value peers, according to Morningstar. Over 10 years, the fund has returned 11.63%, good for the top 30%. Meantime, the fund's expense ratio of 1.19% is well below the category average.

What's the secret? An outstanding manager, for starters. John Rogers, the founder and CEO of Ariel Capital Management and skipper of this fund since its November 1986 inception, digs for stocks trading at a discount of at least 40% to their intrinsic values. While his disciplined approach to value tends to keep him away from riskier, more volatile sectors, Rogers is not afraid to make concentrated bets. The fund only owns 41 stocks, and companies like insurer


(MKL) - Get Markel Corporation Report

can make up more than 4% of the fund's assets. He also brings discipline to the sell side, recently shedding hot small-caps like casino-game maker

International Game Technology

(IGT) - Get International Game Technology PLC Report

as it met Rogers' price target.

While this tortoise may fall behind the rabbits when the market has short-term sprints, we all know how the story ends.

2. (RYTRX) - Get Royce Total Return Fd Inv Report Royce Total Return

Certain people's names have become synonymous with a particular style: Alfred Hitchcock is Suspense. Fitzgerald is Jazz Age. Charles Royce is Small-Cap Value.

In the early 1970s, Royce founded the Royce Funds family. The 13 Royce funds all focus on small-cap and micro-cap stocks -- those under $400 million as Royce defines them -- and employ a strict value-based, "bottom up" approach to investing in individual stocks. One of the best offerings in the Royce stable is the $1.11 billion-in-assets Royce Total Return, which Charles Royce himself -- who has 40 years of investment experience -- has managed since its 1993 inception.

After seven straight years of positive returns, the fund had its first down year in 2002 -- shedding a mere 1.6%. This stellar record of safe and solid returns places the fund in the top decile of its small-cap value peer group for one- and five-year periods. (It's not old enough for 10-year comparisons, but it has notched an average annual return of 12.79%, according to its Web site.)

What's under the hood? Skipper Royce scoops up companies with clean balance sheets, a history of dividend payments and stocks that look cheap. This has led him to great-performing small-caps like Chicago-area insurer

Arthur J. Gallagher

(AJG) - Get Arthur J. Gallagher & Co. Report

. Royce Total Return is one of the firm's diversified funds -- it holds about 340 stocks, and none makes up more than about 1%. In other words, this is a nice safe offering: The fund's beta, a key risk measurement, is 0.5%, well below the category average 0.89%. And the relatively low turnover helps keep your costs down -- its expense ratio is 1.24%.

3. (RYSEX) - Get Royce Special Equity Inv Report Royce Special Equity

One of the few small-cap value funds to perform better than Royce Total Return this past year is its sibling, Royce Special Equity, which notched a 15.3% return. Yes, a positive return, placing it in the top 1% of all small-cap value funds. In 2001, the fund returned an impressive 30.8%, good for the top 6%, according to Morningstar.

While the $394 million-in-assets Special Equity fund is Total Return's sibling, they hardly share the same portfolio DNA. Charles Dreifus, who has 35 years investing experience, has run the fund since 1998 with a keen eye on clean balance sheets and undervalued stocks. Unlike Total Return, this is a concentrated fund -- it owns 75 stocks and takes bigger bets on individual companies. Its top 10 holdings make up 29.1% of the fund; the top 10 holdings in Total Return make up 8.5%, by comparison. Special Equity's top holding, food-products company

Lancaster Colony

(LANC) - Get Lancaster Colony Corporation Report

, makes up 3.8% of the fund.

That concentration makes it a bit more risky than other funds on this list, Dreifus' uncanny ability to pick winners -- aided by a classic Benjamin Graham approach to investing -- has paid off in spades. Morningstar notes that 20 of the fund's top 25 picks notched positive returns this year.

4. (TASCX) - Get Third Avenue Sm Cap Value Fund Inst Report Third Avenue Small-Cap Value

This fund, with $414 million in assets, is the lesser-known and more-aggressive stable mate of Marty Whitman's $2.35 billion Third Avenue Value fund -- which, despite the name, is more of a small-cap blend fund. For a pure small-cap value play, Third Avenue Small-Cap Value is a smart bet.

Curtis Jensen, at the helm since 1997, picks companies for this concentrated fund with an eye of clean balance sheets, strong management and understandable businesses -- and, of course, undervalued stocks. Jensen tends to make concentrated sector and stock bets, including recent moves into the technology arena: badly bruised

Comverse Technology

( CMVT) is now the third-largest holding thanks to Jensen's recent buying, according to Third Avenue's Web site.

This focused approached means fundholders may be in for a bumpier ride -- and some down times, like in 2001 and 2002 -- for the long run, this fund has been a winning pick. Its five-year average annual return of 5.95% through January 17 puts it in the top 20% of its peers, according to Morningstar.

The fund sports a below-average expense ratio of 1.23%.

5. (FAMEX) - Get FAM Dividend Focus Report FAM Equity-Income

This little gem of a fund has performed exceptionally well since its April 1996 inception, turning in one-, three- and five-year returns in the top fifth of its small-cap value peers. FAM Equity-Income posted a modest 2.2% loss in 2002, but it sports a three-year average annual return of 12.36% and five-year average annual return of 6.36%, according to Morningstar.

Tom Putnam, founder and chairman of Fenimore Asset Management (the FAM of the fund's title), co-manages the $60 million-in-assets fund with Paul Hogan. The tiny fund, which sports a 1.21% expense ratio, holds on 31 stocks, so it certainly qualifies as a concentrated offering. According to FAM's Web site, the top seven holdings -- among them well-regarded companies like

Ethan Allen

(ETH) - Get Ethan Allen Interiors Inc. Report

-- each constitute more than 4% of the fund's portfolio.

Fenimore -- based in Cobleskill, N.Y. and taking its name from "local" author James Fenimore Cooper -- manages only two funds and isn't too well-known, but you can buy the funds through Fidelity's Fund Network and other big shops.