Small-cap growth funds are down this year, but they make sense for a long-term investor.

First things first, these funds typically focus on the fastest growing stocks with a market capitalization below about $1.5 billion. Since there are thousands of small-caps out there -- many with little or no coverage from Wall Street analysts -- a fund can often be a cheap and easy way to get access to these small fries without having to bet the farm on one or a few shaky shops.

And there's reason to bother: These young, smallish companies are less stable than big-cap household names, but they also can offer more growth potential. Over the past 10 years, the average small-cap growth fund's 19.8% annualized return beats the

S&P 500

by more than a percentage point each year.

After the past few years as big-cap growth stocks have led the market, your portfolio might have a major slant toward bigger names. If so, a small-cap fund could be a good way to diversify your stock holdings as long as you won't need the money for at least five or 10 years.

We've sifted the group to single out those funds that beat their peers over the past one- and three-year time periods, according to

Morningstar

. Here's a top-10 list, ranked by one-year return.

One caveat with small-cap funds is that they tend to close -- or should close -- once they top $1 billion to $2 billion in assets. Since they tend to focus primarily on small, thinly traded stocks, they can move stock prices as they build positions, denting their returns.

Two funds that made our list,

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Wasatch Micro Cap and

(FUSMX)

Fremont US Micro Cap, are currently closed to new investors. This doesn't necessarily mean they're closed forever, though -- the No. 2 fund on our list,

(KOPPX)

Kopp Emerging Growth, was once closed but is now open.

Among the other funds, you've got plenty to choose from. At the top of the list is

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Green Century Balanced, which is one of the odder funds out there. The no-load fund blends an aggressive portfolio of stocks with a tech and health care bent, with a bond portfolio. Jackson Robinson has held the reins since 1995 and over the past five years the fund's 23.5% annualized return trounces both the S&P 500 and 85% of its small-cap growth peers, though the fund's 2.48% annual expense ratio is well above the category's 1.66% average.

PBHG

funds are typically associated with a high-octane style, but the no-load

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PBHG Strategic Small Company fund might be worth a look if you're somewhat conservative. Co-managers James Smith and Jerome Heppelmann blend highfliers and some cheap stocks in the fund, earning it a below-average risk score from Morningstar relative to its peers. That approach has worked out well, as the fund's 21.5% three-year annualized return beats the S&P 500 by more than 7% and 75% of its peers.

If you're looking for a fund toward the aggressive end of the scale, you might consider the broker-sold

(KOPPX)

Kopp Emerging Growth fund. Co-manager LeRoy Kopp and Sally Anderson like tech -- more than 76% of the fund's assets were invested in tech on Sept. 30 -- so you shouldn't buy the fund unless you're ready for some mercurial performance. That said, the fund's 40.9% three-year annualized return tramples the S&P 500 and 98% of the fund's peers.

If you invest on your own and are looking for a similarly high-octane style, consider a couple of tech-heavy, no-load funds that didn't make our list due to lackluster returns this year:

(RSDGX) - Get Report

RS Diversified Growth and

( SDLI)Van Wagoner Post-Venture. Both funds have a taste for tech that can hurt them in years like this one, but each has homerun potential. Over the past three years they both beat more than 90% of their peers.

The Van Wagoner fund, with quick-draw manager Garrett Van Wagoner at the helm, boasts a whopping 52.2% three-year annualized return and posted a 237% return in 1999's go-go market.

What stock picks propelled our leading small-cap growth funds? Well, since these managers have thousands of stocks to pick from, it's an eclectic mix with little consensus. They have also ridden up plenty of big-caps like semiconductor shop

SDL

( SDLI), set to merge with fellow big-cap

JDS Uniphase

(JDSU)

.

Editorial assistant Dan Bernstein contributed to this article.