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Funds seek to find right mix of small and large companies

NEW YORK — Ken Kam, a portfolio manager, remembers the date just before the tech stock bubble imploded, when he warned his closest friends and family it was time to get out of tech stocks. March 18, 2000, was his wedding day and he made the prescient call during a toast at the reception.

Though not the typical stuff of wedding speeches, Kam felt compelled to give the advice because so many friends and family had accepted his guidance during the five years he oversaw a technology fund. Toward the end of running that fund, however, he felt increasingly constrained by the fund’s singular focus on technology stocks.

He now oversees what is often referred to as a multi-cap or all-cap fund and contends investors are often better served when managers are free to pursue a broader investment strategy rather than being limited to a particular type of stock or asset class.

Lately, investment professionals have debated whether momentum would ultimately shift to large-cap stocks after nearly six years in which small-caps generally outperformed. Investors unsure of how to play a market that appears to be changing might consider multi-cap funds.

Backers say the funds’ inherent flexibility could prove crucial if the economy continues to slow and Wall Street looks to reallocate some money.

Don Hodges, who runs the Hodges fund, contends the leeway afforded to funds that invest in a variety of disparate companies can offer investors protection, particularly during times of uncertainty and tumult on Wall Street.

“It seems to provide opportunities regardless of what the markets do,” said Hodges, who runs his eponymous fund with his son. In 2003, the fund, which generally is comprised of about 100 stocks, was heavily invested in small and mid-caps. Now, about 65 percent of the holdings are in large-cap stocks to reflect Wall Street’s penchant for companies viewed as more defensive during leaner economic times.

Hodges, like Kam, contends some mutual funds have become too tightly focused and are hidebound by narrow parameters set forth in their prospectuses.

“It’d be like telling the football team you’re only going to run during this game and you can’t throw passes,” Hodges said.

So with a perhaps overwhelming array of choices before them, one might wonder how multi-cap fund managers would choose their sectors or stocks.

Hodges seeks areas or individual stocks that he expects will go up in the next 18 months, so that he is always, in a sense, recruiting new talent for his metaphorical football team. While seeking sleepers that will become leaders isn’t unique to managing multi-cap funds, Hodges contends that a focus on finding successful companies regardless of their asset class is more fruitful than mining only certain categories for winners. The fund, with assets of $514 million, has a five-year average return of 18.96 percent.

“The longer that I’m in the business the more I realize regardless of what your philosophy is, how well you do depends on which companies you’re invested in,” he said.

Of course most advisers acknowledge there is risk with the ability to invest anywhere, though they point out there is some degree of risk in any investment and that their freedom shouldn’t be mistaken for a lack of discipline.

Hodges said his fund wouldn’t get above a 6 percent stake in a single company in order to preserve the fund’s diversity; its largest present position stands at less than 4 percent.

Still, no fund manager can escape making mistakes.

Kam said he was too slow to react to a shift in the market in April 2005, cutting into his fund’s performance. “It took me too long to make this change,” he said.

The fund he runs, the Marketocracy Masters 100, with assets of $41 million, could be described as a sort of American Idol of the mutual fund world. Like the talent-search TV show, Marketocracy lets aspiring fund mangers audition for a shot at helping run the Masters fund by shepherding a virtual portfolio over the Internet.

He sees the flexibility of an multi-cap fund as being able to best represent shareholders’ interests, many of whom he contends simply want a portfolio manager to handle their money in the most prudent way and are less concerned with the types of investments.

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