Within just three days in March, the Fairholme Fund plunged nearly 7% even though the overall stock market barely budged. Reason: Fairholme was invested in just nine stocks (compared with dozens or hundreds for a typical mutual fund), and one of them was Fannie Mae, the government-sponsored mortgage backer whose stock dropped by more than 30% on reports that Congress might scale it down.

Fairholme is an example of a “focused fund,” one that concentrates its investments in a very small number of stocks that the manager believes have the greatest potential to outperform the overall market. That means the fund could do very well if the manager’s picks are on target or suffer badly if even one or two stocks crumble. Despite the March setback, the Fairholme Fund gained 28% over the past year through June 30, putting it in the top 3% of its large-cap value fund category, and it is in the top 1% over the past 10 years despite a 32% plunge in 2011 on untimely financial stock bets. That makes the fund attractive, but only for investors who can stomach that kind of volatility. In all, there are more than 300 focused funds.

Focused funds rated five star by S&P Capital IQ, each of which holds about 25 stocks: Baron Partners (BPTRX) is an aggressive midcap growth fund managed by Ron Baron for 22 years. It focuses on companies that he believes can double their stock prices in three to five years. Hennessy Focus (HFCSX), for moderately aggressive investors, focuses on companies that have above-average return on capital. Oakmark Select (OAKLX) chooses about 20 of the 250 largest US companies trading at least 40% below the price that veteran manager William Nygren thinks they are really worth.