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A Wild Ride, but Some Might Find These Small-Cap Funds Worth It

For investors unafraid of added risk, these quality funds offer exposure to stocks of some of the market's smaller companies.

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For most investors, volatility is an unwelcome attribute in a fund. Today's rocky market presents more than enough uncertainty for their appetites. Last week Five-Star Investor looked at funds with below-average Morningstar Risk ratings in a notably volatile segment of the market: small-cap stocks. The idea was to identify funds our analysts like and that also provide exposure to small-company stocks without the bumpy ride that is often part of the bargain. After all, lower volatility helps reduce the chances of investors reacting to dramatic market swings by jumping into and out of funds, which tends to be a recipe for poor investor performance.

But for investors who don't mind a bit of drama in their portfolios, we turn this week to higher-risk small-cap funds that our analysts think have a good shot of delivering high long-term returns to compensate for all that volatility. Above-average risk might indicate that a fund's management team is more willing to take chances than its competition by, say, delving into micro-cap or high-priced stocks or building concentrated portfolios. To be sure, these funds are not for everyone, and the conventional wisdom about keeping volatility at bay still applies. But for those with a sufficiently long holding period who are undeterred by the roller-coaster ride these funds provide, we offer the following screen.

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Adam Zoll does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.