Big hopes for big fish

Don Hodges made a lot of money the last few years buying stocks of small and mid-size companies.

But these days Hodges is betting that bigger is better.

The Dallas-based manager of the top-ranked Hodges has about two-thirds of his portfolio in large-capitalization stocks, such as Coca-Cola Co. and Walt Disney Co. That's a reversal from three years ago, when large-cap stocks accounted for only a third of his holdings.

Hodges runs a multi-cap, or "go anywhere," fund, which can buy stocks of any size. And like many other multi-cap managers, Hodges thinks large-cap stocks are poised to outdistance shares of smaller companies for the first time in seven years.

"I think large-cap has been undervalued," Hodges said. "It's time for that part of the market to start outperforming."

Mutual fund investors may want to look to what Hodges and other investment pros are doing as they manage their own portfolios and retirement funds.

Indeed, many of the forces that have propelled shares of big companies in the past are once again falling into place.

Overseas economies are strong and the dollar is weak, benefiting companies that do business abroad. Also, large-cap stocks are moderately priced relative to their earnings. And the stock market had a shaky summer, making the relative stability of large companies more appealing.

To be sure, money managers have repeatedly predicted a resurgence of large-cap dominance in recent years only to be proved wrong, or at least premature.

But large-cap indexes outpaced smaller-stock measures in each of the last two quarters and are on pace to come out on top for the year for the first time since 1999. That's because large-caps held up better during the stock market's deep sell-off this summer and have jumped more in the recovery that began last month.

In the third quarter of this year, in fact, the Russell 2,000 small-cap index lost ground, falling 3.1%. Meanwhile, the Standard & Poor's 500 index and the Dow Jones industrial average -- both made up of large-cap stocks -- ended the quarter in positive territory, recording total returns of 4.2% and 2%, respectively. Total return figures assume dividends are reinvested.

Large-cap versus mid-cap

That disparity translated into the performance of mutual funds that individual investors might hold. Large-cap growth funds had an average total return in the third quarter of 5.4%, compared with 3.7% for mid-cap growth funds and only 0.9% for small-cap growth.