August/September 2009 Features Spotlight: Stay in the Shallow End With the recent runup and lingering economic woes, investors should keep a toe in small companies but avoid making a big splash. 36 Recession Rallies’ Sweet Spot Our research finds that to earn the small-cap premium, investors need to hit a troubled economy’s inflection point. 42 What Makes Small Caps Tick Because of their unique economic exposures and diversification, small companies are a necessity for investors’ portfolios. Morningstar Conversation 46 The Trick to Small Caps Veteran managers Chuck Royce and Irene Hoover discuss how they find small companies on the upswing. Undiscovered Managers 53 Value Hound Running two small funds in North Carolina, Steven Scruggs knows how to find promising, out-of-theway firms at bargain prices. 3