Chuck Royce first took the helm of the Pennsylvania Mutual fund in the midst of a brutal bear market in 1972. The fund nose-dived early on, but Royce, the longest tenured of all small-cap managers, has more than made up for it over time. In fact, Pennsylvania Mutual, long the flagship fund of his investment company, has managed an average total return of nearly 16 percent annually over the past 30 years. In the process it has beaten the Russell 2000 small-cap index over the three-, five, ten-, 15-, 20-, and 25-year periods ending Nov. 30, 2006.

While small stocks are considered riskier than large ones, Royce, 67, still applies the lessons of that '70s bear market and as a result, focuses on preventing painful losses even during market downturns. These days, because he believes the economy will grow more slowly over the next couple of years than it has in the past few, Royce says he has been shifting away from microcaps and into larger, higher-quality companies.

Royce's top holdings include asset-management firm AllianceBernstein, welding-equipment maker Lincoln Electric Holdings and teen retailer Claire's Stores. "We have a three- to five-year horizon, so we can afford to be wrong in the short term," Royce says. "We are buying something because we believe we can compound at a mid-teens or 20 percent rate."