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 ( MW), 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."

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