One of the selling points of mutual funds is that they offer investors instant portfolio diversification. Instead of betting all their money on one or two stocks, fund holders can invest easily in dozens or hundreds of companies.

But there is some debate over whether investing in one of these funds which typically devote less than a percentage point to each of their holdings shortchanges investors when certain stocks soar. Why own all of the 500 stocks in the famous S&P index when just five or 10 perform best?

That s where so-called focused mutual funds come into play. We define focused funds as those with fewer than 50 stocks in their portfolios. Morningstar lists over 6,000 funds and share classes that fit this description. We threw out funds that charged high fees and sales loads. They also had to be open to new money and require a minimum investment of less than $5,000. In addition, because successful focused funds depend on a manager calling the shots, we limited our selections to actively-run funds, leaving out funds of funds or other categories. We think the manager component is especially important in this type of a market recovery. It s more important to get a stock picker to separate the good opportunities from the bad, says Brett D Arcy, the chief investment officer at CBIZ Wealth Management. We ultimately were left with 10 funds.

Focused funds aren t usually recommended for conservative investors because of their narrow composition; some have over 50% of their assets in their top 10 holdings (By comparison, an S&P 500 fund will have less than half that amount in its top 10 holdings.). So that means one or two bad stock picks can easily sink a focused fund while a broad market index offering won t be impacted as much.

On the other hand, a hot stock or two can send a focused fund soaring passed an index fund. Fairholme is a focused fund that owns just 20 stocks. According to Morningstar, it is up 31% (vs. 20% for the S&P 500) thanks to stocks like Sears, Hertz and AmeriCredit. Fairholme is Morningstar s top-ranked large blend fund over the trailing three- and five-year time periods.

Regardless of the perceived risk, research supports focused funds concentrated portfolios. In You Can Be a Stock Market Genius Joel Greenblatt, the founder of Gotham Capital, says that investors can cut 46% on non-market risk by owning two stocks, rather than just one. The risk is cut further as investors add additional companies. But once the portfolio hits six to eight stocks in different industries the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, Greenblatt says.

The flip side of that argument comes from the index fund camp. Vanguard founder John Bogle says it s futile for a manager to try to beat the broad market over the long haul. At some point, the manager is bound to lag a diversified index. So investors would be better off just buying a cheap index offering, sitting back and relaxing.

That said, the funds on our list are run by seasoned managers. They sport below-average fees and top performance track records. Those are the hallmarks we look for in a fund. Fairholme, FMI Common Stock and Yacktman are making return appearances to this screen. They would make a good starting point for any investor interested in focused funds.

The Criteria: The funds on the table below have portfolios that own fewer than 50 stocks. They are open to new money, require a minimum investment of less than $5,000 and charge an annual expense ratio less than 1.5%. In addition, they have performance track records during the trailing three- and five-year time periods that put them in the top 25% of their peer groups. They were also beating the year-to-date return of the S&P 500. Finally, we limited ourselves to actively managed funds, leaving out funds of funds.