If recent market volatility makes you yearn for more steady returns, it may be time to turn over some of your mutual fund portfolio to an active manager. If you can handle the bigger price swings, higher costs and higher risk, there may be a payoff for your investments.

Financial advisers aren't abandoning their mantra that a diverse, balanced portfolio, aligned with a stated set of investment goals, is the best foundation for investment success. But this may be a time for smart stock-pickers to prosper. Funds whose managers pick their stocks selectively, rotating through different sectors and trying to time the market, charge more and can incur higher losses, but some of those funds, particularly those that hold stocks in fewer companies, are worth a look.

"With a sideways market, we noticed that actively managed funds trounced the indexes," says Jeff Tjornehoj, an analyst at mutual fund tracker Lipper.

The five-year total return for the S&P 500 is minus 1.2%. Actively managed funds tracked by Lipper are up 4.22% for the same period. Over the last 12 months, the index is up 35.12%, while the actively managed funds tracked by Lipper are up 37.88%.

A recent University of Michigan study concludes that less may be more when it comes to actively managed funds. Researchers tracked the returns of 1,800 actively managed funds (excluding sector-oriented ones) between 1984 and 1999, and found that funds with the most concentrated stock portfolios had higher returns than the ones with the most diverse holdings.

In essence, the study concluded that if a mutual fund had a few of the very best stocks in each given sector, it fared better than funds that spread their holdings through a larger number of companies in those categories. Funds with the highest concentrations of stocks had an average annual return 1.9% above their more diverse actively managed peers, according to the study.

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