TH,
I think you're "badly mistaken". 
Two articles that say otherwise:
The Big Lie - from W. Bernstein
Problems with the Manager Data Universe - from SSGA
As the SSGA article points out nicely, there is much more survivorship bias in small caps. It is certainly correct that small caps have much higher transaction costs than large caps. Hence you would want an index. Same deal with Int'l stocks, especially emerging markets stocks.
If you take a small cap fund (with the same manager for the whole time), like Ariel, and do a three factor regression (for market risk, small cap risk, and value risk), and still find that there is a statistically significant alpha, then you can actually say that this manager has skill. Plus, small caps funds are notorious for style drift (holding a lot of mid caps plus small caps).
Though, if I was going to use a managed fund for small caps, I'd definitely use Vanguard's explorer b/c of the low expense ratio, and fairly low turnover. Could be a closet index fund. 
- Alec
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