(FORTUNE Magazine) – Plow your money into a core portfolio of high-quality companies and then stick to your guns. Although it's a strategy advocated by stock-picking legends like Benjamin Graham, it's apparently not an approach favored by most mutual fund managers today: According to Chicago-based fund tracker Morningstar, the average actively managed U.S. equity fund turns over its entire portfolio every year. Considering that the average equity fund also holds about 140 different stocks, that's a lot of trading.

As it turns out, most of that activity is not paying off for investors. Quite the opposite, in fact. A recent Morningstar study shows that managers who adhere to a buy-and-hold strategy--and stifle the impulse to react to short-term market gyrations--tend to outperform their faster-fingered rivals.

Morningstar analyst Kerry O'Boyle first screened the universe of actively managed equity funds for 1992--98 to find those that fell into the lowest quartiles for both portfolio turnover and the number of stocks held. He then went back and tracked the five-year performance for each fund, year by year, from 1992 through 2003. The result: Among all style categories, the concentrated, low-turnover funds overwhelmingly beat their peers. An astounding 93% of concentrated small-cap growth funds outperformed the category average, for example. Even concentrated mid-cap blend funds, the group that was least successful at beating the average, came out on top 73% of the time. Plus, funds with relatively narrow portfolios were winners during both the bull market of the late 1990s and the ensuing bear market.

With that in mind, FORTUNE decided to comb through the Morningstar research to identify a handful of the best buy-and-hold bunch. We started with funds whose annualized returns over the past five-and ten-year periods were better than their category averages. Of these, we selected only ones that are open to new investors and have lower-than-average expense ratios. We leaned toward firms with reputations for solid fundamental research and sought out managers who have a lengthy track record and follow a well-defined strategy. In the end we settled on seven funds across a range of asset classes (see table, "Seven That Stick to Their Guns").

Why do buy-and-hold funds with more concentrated holdings tend to outperform? One reason might be that they refuse to compromise their standards. Take the Jensen J fund. Manager Gary Hibler will consider buying only the stocks of companies that have notched a return on equity of at least 15% during each of the past ten years. Given that stringent criterion, it's not too surprising that the fund holds only 25 stocks and has a minuscule annual turnover rate of 5.3%. Hibler has held blue-chip stalwarts Equifax, Coca-Cola, Merck, and Abbott Laboratories since the fund's inception in 1992. The strategy has paid off handsomely: Jensen J has returned better than 13% annually on average over the past ten years. "If you've got the 25 best companies in the country," says Hibler, "you should be able to sleep at night."

Given the relatively small number of stocks these funds hold, you might be tempted to think that they are inherently riskier than the average fund. But Morningstar's O'Boyle says the results of his study simply don't back up that notion. One key reason, he says, is that fund managers who own fewer stocks and hold them longer typically understand the businesses in which they invest far better than the average manager.

That's certainly a crucial point for Eric Ende, the longtime manager of the FPA Perennial fund. With a portfolio of 36 stocks and an average annual turnover rate of about 23%, Ende notes that he has to learn about only seven or eight new companies every year--instead of the 100 or so new names the typical fund manager must grapple with. "There's two ways to think about getting returns," says Ende. "You can buy the stock or buy the business. We buy the business."

Sometimes, though, owning only a handful of businesses creates short-term pain. It can be tough to stay true to your principles when a sector or asset class is booming and you're not in it. Just remember that these funds are designed for the longer haul. As O'Boyle puts it, "You have to have patience with their particular style, as much as they have to have patience in picking stocks and holding on to them."