Mid-cap stocks get no respect. Many investors overweight small and large stocks — while giving short shrift to mid caps. Although they make up a third of the market's total capitalization, mid caps only account for 15 percent of the assets in equity mutual funds, according to Morningstar.

Part of the cause for the underweighting can be traced to research published by Rolf Banz, a University of Chicago researcher. Studying market returns from 1931 through 1974, Banz found that small stocks outperformed large and mid-cap stocks by wide margins. Startled by the findings, institutions began giving new weight to small stocks. Mutual fund companies rolled out a raft of new small-cap funds.

But even before Banz published his findings, the so-called small-cap effect began to disappear, and mid caps moved into the lead. From 1979 through November 2010, the Russell mid-cap index returned 13.4 percent annually, outdoing both the Russell 1000 large-cap index and the Russell 2000 small-cap index by two percentage points.

Has the small-cap effect disappeared? No, says Jared Watts, a senior consultant with Ibbotson Associates. While small stocks can lag for some periods, they tend to excel over the long run, he says. From January 1926 through September 2010, small caps returned 11.4 percent annually, compared to 10.9 percent for mid caps and 9.3 percent for large caps, according to Ibbotson.

Despite the long-term results, it is a mistake to load up on small stocks, says Watts. In each market cycle, a different asset class leads. So the safest course is to hold a broad mix. “You may get better diversification if you have equal amounts of small, mid-cap and large-cap stocks,” he says.

Large-cap funds that are benchmarked to the Russell 1000 typically hold some mid caps. But to ensure that you hold a healthy dose of the asset class, it may be wise to own a dedicated mid-cap fund. Top choices have lower risks than small caps and greater returns than large caps.

A strong performer is Meridian Growth (MERDX), which has returned 7.9 percent annually during the past five years, outdoing 93 percent of mid-cap growth competitors, according to Morningstar. Portfolio manager Rick Aster looks for stocks with above-average growth prospects and below-average prices. He favors businesses with reliable markets and solid balance sheets. Because of the emphasis on quality companies, the fund tends to be resilient in downturns. During the turmoil of 2008, Meridian outdid its average peer by 13 percentage points.

A favorite holding is Royal Caribbean Cruises. The shares suffered during the recession, but the company outperformed competitors throughout the downturn. As the economy recovers, the business should revive, says Aster. “The cruises cost less than many other types of vacations,” he says.

Another compelling growth fund is Morgan Stanley Mid Cap Growth (DGRAX), which returned 8.3 percent during the past five years, outdoing 95 percent of competitors. The fund looks for companies that can grow for the next three to five years because of competitive advantages. “We are trying to buy unique franchises that we can hold over long periods of time,” says portfolio manager Dennis Lynch.

Lynch is particularly keen on fast-growing Internet businesses. Many such companies have high returns on equity and little need for outside capital to finance operations. One holding is Priceline.com, the travel service. During the recession, investors worried that the travel business would slump, but Priceline.com continued to generate solid cash flow.

To hold a fund in the blend box, consider Aston/Optimum Mid Cap (CHTTX), which has returned 9.3 percent annually during the past five years, outdoing 99 percent of competitors. Portfolio manager Thyra Zerhusen favors companies with strong brands and loyal customers. A contrarian, she likes stocks that Wall Street hates. Once she buys, Zerhusen often holds for five years or longer.

A current holding is The New York Times Co. The media company has suffered from big declines in print advertising, but Zerhusen argues that the online business is growing, and the newspaper retains legions of loyal subscribers. “The readers feel that they cannot do without it,” she says.

For a value fund, try Invesco Van Kampen American Value (MSAVX), which has returned 4.7 percent annually during the past five years, outdoing 77 percent of peers. The fund seeks unloved companies that are performing below their historical patterns. In many cases, operating margins have shrunk because of temporary problems or difficulties caused by the economic cycle. Portfolio manager Thomas Copper aims to buy such troubled businesses and hold them patiently until they turn around.

A favorite holding is Sysco, a big provider of food products for restaurants and institutions. During the recession, sales suffered as consumers ate at home more often. But Copper argues that sales will rebound soon. “As the economy improves, consumers will dine out more,” he says.

Copper also likes Brookdale Senior Living, a big provider of assisted-living facilities. The company typically sells apartments to senior citizens who pay for the properties by selling their homes. But the weak housing market has hurt the shares, as investors worry that potential customers will not be able to finance purchases. Copper says that the company has been able to continue making transactions throughout the recession.

A steady value choice is American Century Mid Cap Value (ACMVX), which has returned 5.8 percent annually during the past five years, outdoing 91 percent of competitors. The fund aims to hit singles and doubles, focusing on solid companies that are a bit undervalued. Holdings typically have transitory problems, such as product recalls. Sticking with steady businesses, American Century excels in downturns. “Our companies are leaders in their industries,” says portfolio manager Kevin Toney. “We avoid broken businesses.”

A holding is Republic Services, a trash hauler that operates landfills. An acquisition saddled the company with debt. But Republic is improving its balance sheet. The company generates solid cash flow in a business that tends to be stable.