Investors in small-cap funds may be in for a big surprise. Many portfolio managers hold heavyweight stocks like Verizon Communications, Boeing and Pfizer in funds that claim to focus almost exclusively on shares of small-capitalization companies.
Overall, 211 out of the 476 actively managed small-cap funds tracked by Lipper own companies with market capitalizations of $10 billion or more. That is more than twice the size of companies that Lipper defines as the focus of small-cap funds.
Investors in these actively managed funds - which include those from such well-known firms as Gabelli, Charles Schwab and T. Rowe Price have several reasons to worry, fund experts and financial advisers say.
(Read more: Investors swap vulnerable bonds for property)
First, small companies typically outperform over time, because they have greater growth prospects than established large-cap companies whose days of rapid expansion are behind them. That said, large caps may offer dividends and hold up better during downturns.
Between 1927 and 2012, for instance, small-cap stocks produced average annual returns of 12.9 percent, compared with a 9.9 percent gain for large companies, according to data from Vanguard. This year, the Russell 2000 index has gained 24 percent since the start of January, compared with a 19.7 percent gain for the large-cap Standard and Poor's 500.
Every dollar in a small-cap fund invested in a mature company like Pfizer -with a market cap of $206 billion - is not going toward what could be its more upwardly mobile competitor.
(Read more; Fund Managers Win as EU Vote Allows for Big Bonuses)
And second, the presence of big companies in small-cap funds can skew an investor's overall asset allocation, effectively giving extra exposure to large companies. That can increase overall risk by giving investors less diversification than they may think they have.
"This is something I absolutely worry about," said Richard Weeks, a managing director at HighTower Advisors in Vienna, Virginia who oversees $800 million in client assets, and carefully balances the assets in his portfolios. "The only way I can try to have a risk managed portfolio is to construct a diversified group of different assets."
Analysts say that small-cap funds are particularly vulnerable to the phenomenon known as style drift - going far afield of their mandates. Part of the reason is that small-cap companies are more likely to become large-caps than vice versa.
"Any good small-cap stock will become a mid-cap stock in time, and managers may not want to sell out of what they see as good companies just because their market caps increased," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
T. Rowe Price's New Horizons fund, for instance, has its largest weighting in Netflix, whose market-cap has swelled from about $5.4 billion at the start of the year to $14.3 billion as its shares have rallied 164 percent. The fund has returned an annualized 15.6 percent over the last five years, putting it in the top 1 percent among small-cap growth funds tracked by Morningstar.
(Read more: Hedge funds lose big in June as outflows jump)
Yet even with that strong performance, "the risk for investors is double dipping, and you have an overlap in your holdings," Rosenbluth added.
Investors who are concerned about overlap can check the fund's holdings through fund trackers like Lipper and Morningstar.
The New Horizons fund, for instance, has nearly 7 percent of its assets in large companies, according to Morningstar, compared with an average stake of 0.5 percent among other small-cap growth funds. The Vanguard Small-Cap Index Fund, by comparison, has 0.3 percent of its assets in large companies.
Too much style drift can be a worrisome sign, says Marcin Kacperczyk, an assistant professor at New York University's Stern School of Business who studies mutual funds. Though some managers end up with big company stocks because of short-term liquidity issues, "it's a big red flag that makes you wonder what else the manager is doing."
Most small-cap funds give their managers some leeway to hold companies with market caps greater than $3 billion, to give them time to sell out of a position or as a place to park cash while shopping for small-cap stocks. These funds can present challenges when they grow too large, effectively hamstringing a portfolio manager who doesn't have enough good ideas to invest in without becoming a majority owner in a company.
But small-cap fund managers say that there are other reasons why giant companies end up in their portfolios. Some blame it on so-called legacy positions, in which a fund is left with a large-cap holding when shares of a small-cap company that the fund owns is later acquired by the large cap.
The $2.8 billion Gabelli small-cap Growth Fund, for instance, holds 37,584 shares of Verizon, an approximately $1.8 million stake that makes up about 0.1 percent of its assets. The fund has held Verizon, now with a $144 billion market cap, since 2000 after the telecom giant purchased fund holding Price Communications.
Gabelli would not comment on why the fund has held the position for so long or if it plans on selling it. The $12.2 billion T. Rowe Price New Horizons fund, meanwhile, owns 25,814 shares of Priceline.com, a $21.3 million stake that represents about 0.2 percent of assets. The fund originally owned shares in Kayak before the company was bought by Priceline.com in late 2012. Priceline's market cap is now $44.4 billion.
Others say their funds have been miscategorized by fund trackers like Lipper, which is owned by Thomson Reuters.
Richard Barone, the head of the Ancora Group, said that his $10.1 million Ancora Special Opportunity fund owns Pfizer and Citigroup because it was "never intended to be a small-cap fund" but is nevertheless categorized as such.
Lipper, for its part, defines a small-cap fund as one that holds 75 percent of its assets or more in companies with market caps of $4.7 billion or less. Small-cap index funds, by comparison, tend to hew to the weighting of the Russell 2000 benchmark, which does not contain any companies with market caps greater than $8 billion. So those funds may hold larger companies on average but don't hold any $200 billion behemoths.
Lipper reviews a fund's classification twice a year, and allows funds to request a category change every time they send in a new set of holdings.