Many investors can do the necessary research and typically make good decisions when adding blue-chip large-cap U.S. stocks to their portfolios such as Gilead Sciences (GILD) and Disney (DIS), my current top two picks. However, it is much tougher to research and evaluate higher-risk small and mid-size company stocks.

I believe most of us are better served if we delegate the selection of smaller stocks to mutual fund managers and their analysts. They work full time trying to select a winning portfolio and often make on-site visits to companies they are considering.

Certainly, it pays to have a percentage — perhaps 20 to 30 percent — of your portfolio devoted to higher-risk small/mid-cap stock funds. For almost 90 years, since 1926, small company returns have averaged 12 percent, 2 percentage points more than large-company stocks. Subtract 3 percent a year for inflation to arrive at a small-company real return of 9 percent. Therefore, a 9 percent average doubles your purchasing power every eight years. (The well-known rule of 72 takes your average annual percentage return, divides it into 72, to arrive at the number of years it will take your investment to double.)

Typically, small/mid-cap funds do best when they are newer with less money in them so that their managers’ top picks can affect performance more favorably. Also managers of smaller, newer, funds don’t have to make tough sell decisions as often.

I’d like to recommend four growth-oriented small/mid-cap funds that I own. Coincidentally, they all began, less than two years ago, in 2013. I think investors this year are more willing to pay up for growth stocks, given the current low-growth economy.

Last year, the small-cap Russell 2000 index had its worst year since the 1990s versus the S&P 500, gaining only 5 percent while the S&P 500 was up 14 percent. However, for the first quarter this year, the Russell 2000 rose four 4 percent compared to less than 1 percent for the S&P 500. (Morningstar reports that the average small-cap growth fund gained 5.8 percent last quarter compared to the average small-cap value fund that was up only 2.3 percent.)

Many experts think the “catch-up” by small stocks will continue, given a much stronger dollar — up 20 percent since last summer — that negatively impacts earnings of mostly large companies. (More than 40 percent of the sales of S&P 500 companies take place in foreign countries.)

Earlier this month, I bought Baron Discovery (BDFFX), a small-cap growth fund. Headquartered in NYC, Baron currently has $28 billion under management in 13 mutual funds. BDFFX began September 30, 2013 when two outstanding Baron analysts — Randy Gwitzman and Laird Bieger (both with MBAs from Columbia) — were promoted to run Baron’s newest and currently its best-performing fund.

Last year, BDFFX gained 13 percent, and this year it rose 7 percent last quarter, so far attracting about $100 million in assets. The managers specialize in finding about 60 high-growth small and microcap companies that have great long-term prospects.

Reading this month’s “Mutual Fund Observer,” my favorite free on-line mutual fund newsletter, I discovered a write-up about a new tiny mutual fund, Gator Opportunities (GTOAX), that currently only has about $1 million in it. Managed by Lee Kronzon, who has masters degrees specializing in economics and finance from both Princeton and Stanford, it specializes in high quality stocks using a GARP (growth at a reasonable price) mantra. Kronzon had a fine decade-long stint launching and helping manage a successful Goldman Sachs fund.

Lower risk than BDFFX, it currently has 67 percent in small-cap stocks and 32 percent in mid-caps. Launched Nov. 6, 2013 in Tampa, it returned 13 percent last year and added another 7 percent last quarter. Surprisingly, it can be bought for only a $100 minimum, without transaction fees, at discount broker Scottrade.

The highly-rated Hodges Company is based in Dallas where it launched its new Hodges Small/Mid Cap Fund (HDSMX) Dec. 16, 2013. Its manager, Donald Hodges, runs the older Hodges Small Cap Fund. It was one of only two actively-managed funds, out of more than 2800, that ranked in the top 25 percent of its peer group every year for five years from 2010 to 2014. It returned 6 percent last year but gained 8 percent last quarter.

My final pick is Meridian Small Cap Growth (MSGAX) managed by Denver-based Brian Schuab and Chad Meade, two managers who had an awesome record at Janus Triton. Their record at Janus was simply sensational — from 2005 -2012, their Triton Fund beat its benchmark, the Russell 2000, by an average of more than 4 percent a year. Last year, MSGAX was No. 1 in its category, skyrocketing 20 percent. However, this year so far it has taken a breather, rising 4 percent last quarter.

All of my four picks, launched in 2013, have significantly outpaced their peers’ average since inception. Obviously, these funds are higher risk than average because they are more growth-oriented and buy smaller-company stocks. However, higher volatility often can produce higher returns, and it seems quite likely that small company stocks will rack up better numbers this year than their larger brethren.

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Larry Hungerford is a partner at Woodard & Co. Asset Management Group in Bermuda Run. He can be reached at larry@wcamg. com.

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