Despite the results of her firm's study, Morningstar's [Amy Arnott] says compact funds are worth buying if "you can find one of the real winners." Sequoia, CGM Capital Development and FPA Capital funds are three she recommends because of their strong long-term records. But investors who buy these funds should be aware that they might not be as diversified as they might expect a mutual fund to be. With mutuals, less can be more

"I have more success managing a portfolio of 10 stocks that I know in depth than one that contains 100 stocks in which I only have a surface knowledge," says Bill Ruane, co-manager of the Sequoia Fund. Sequoia Fund spreads $1.6 billion of shareholders' money among 23 stocks. That means it devotes an average $70 million, or 4.4% of assets, to each stock. In contrast, AIM Constellation Fund has its $3.6 billion spread over 255 stocks, making its average stock holding about $14 million, or just 0.4% of assets.