Mutual funds: Freedom crucial

NEW YORK – Ken Kam, a portfolio manager, remembers the date 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 in which 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 by funds that invest in a variety of often-times 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 comprises about 100 stocks, was heavily invested in small and mid-cap stocks. Now, about 65 percent of the holdings are in large-cap stocks to reflect Wall Street’s penchant for stocks viewed as more defensive during leaner economic times.

Hodges, like Kam, contends some mutual funds have become too narrowly 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.

“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.

Mark Coffelt, who manages the Texas Capital Value & Growth fund, with a five-year return of 15.99 percent and assets of $77 million, examines how a stock has done in the past 12 months when deciding whether to invest.

“That gives you a long enough perspective on which one is going to work,” he said, adding that 12 months is “not so long that you don’t get a good part of the return. We try to be in the sweet spot of the market.”