Most investors have learned over the years to avoid small mutual funds. A diminutive asset base can indicate a manager’s lack of experience or a flawed investment strategy. It also increases the risk that a fund might close shop, leaving investors with an unwanted tax bill and a pressing need to put cash back to work. Small funds also tend to have higher expense ratios compared to their larger peers because economies of scale are far more difficult to realize.

But painting in such broad strokes can result in missed opportunities. Often a fund remains small for legitimate reasons. Some managers don’t pursue new assets aggressively. Other funds aren’t easily pigeonholed into one style box and consequently don’t attract attention from institutional investors. In many cases, small funds boast excellent operational records and act in the best interests of their shareholders.

The following three funds have appeared repeatedly in the screens we run to compile The Rukeyser 100. These offerings have generated exceptional returns and are helmed by able management teams. These funds’ performance have passed muster for inclusion in our list of top-performing mutual funds. But these small fry have been edged out by their larger cousins–an oversight we intend to rectify in these pages.

Tiny Trio

Bread & Butter (BABFX, 888-476-8585) is an intriguing fund that has struggled to accumulate assets since its launch in October 2005–the fund holds just $1.5 million in assets under management.

Over the trailing three years, Bread & Butter has outperformed the S&P 500 by more than 6 percent, ranking the fund in the top 3 percent of its category. Its performance over the trailing five years is equally impressive.

Manager James Potkul employs a deep value, contrarian investment style with a focus on undervalued cash flows and book values. He prefers to invest in companies with a strong balance sheet and a leading position in industries that have fallen out of favor with the market. As a result, Bread & Butter’s portfolio sports low price-to-book and price-to-earnings multiples.

The fund’s broad mandate gives Potkul the flexibility to invest in virtually any asset class save for straight bonds–though he can dip into convertible issues. Potkul will trim positions when he believes a stock is fully valued.

Potkul runs an extremely compact portfolio that averages 15 positions. Such a concentrated portfolio isn’t a result of the fund’s small asset base; about a third of the fund’s investable assets generally are tucked into cash. Potkul doesn’t invest for investment’s sake.

Potkul is concerned about what he considers an aggressive attempt by the Federal Reserve to reinflate the US economy. Consequently, he’s focused on companies that serve as a hedge against inflation or are able to pass rising input costs on to customers. The result is a portfolio heavy on energy names.

He has also built up substantial exposure to the health care sector, believing that the industry has been unfairly battered as markets suss out the potential side effects of President Obama’s controversial health care reform.

We are generally leery of extremely small funds, but Potkul eats his own cooking. According to the fund’s Statement of Additional Information, Potkul has invested $100,000 in the fund from his own pocket and is likely its largest individual shareholder.

Adirondack Small Cap (ADKSX, 888-686-2729) has an asset base of $58.2 million, with more than half of its assets invested in micro-cap companies with market capitalizations of less than $300 million.

Co-managers Gregory Roeder and Matthew Reiner prefer out-of-favor names and have sifted through the post-credit crisis rubble for small-cap financial firms. They’ve also enjoyed some success working in post-bankruptcy names, an arena many funds avoid because of the daunting amount of research required.

But the duo’s favorite stomping ground is in overlooked technology companies such as Verigy, (NSDQ: VRGY) which supplies testing equipment to chipmakers, and DDi Corp (NSDQ: DDIC), which fabricates and assembles printed circuit boards.

That strategy has paid off handsomely for Adirondack Small Cap’s shareholders. The fund is ranked near the top of its category on a three- and five-year basis, a performance that garnered the fund a 2010 Lipper Award.

With just under $28 million in assets, Valley Forge (VAFGX, 800-869-1679) is something of an anomaly in that it doesn’t appear to have ever sought out the limelight.

The fund’s launch in 1972 stemmed from the investment partnerships that Valley Forge’s manager formed while he was an engineer with General Electric (NYSE: GE) in the late 1960s.

Klawans and his co-manager Greg Aronhaldt have taken advantage of the ongoing economic recovery by overweighting industrial and consumer cyclical names.

However, the pair has also maintained a heavy allocation to defensive consumer-oriented names. These investments represent 16.4 percent of the fund’s investable assets.