How Fear Rules the Fund Flock

"A fund manager is competing with other fund managers, and the close scrutiny they face discourages going out on a limb," Dennis said. "If as a fund manager I do what everyone else does, even if I lose money at the end of the quarter, I can say, 'I did what everyone did. You can't fire me.'"

Beta Max

Some fund managers concede this point, saying that not being invested in a "high beta" or higher-risk sectors means lagging behind when they have an extraordinary burst, such as technology and telecom have had since Oct. 9. From a job-security standpoint, that risk outweighs the lesser risk of being invested in those stocks when they crater.

This results in herding into high-beta, erstwhile growth stocks such as Microsoft(MSFT Quote), Intel(INTC Quote), Flextronics International(FLEX Quote) and Cisco(CSCO Quote).

Dennis considers institutional ownership levels of around 45% or above to be high. Institutional ownership in these four stocks range from 52.4% in Microsoft to 70.4% in Flextronics, according to ownership tracker Lionshares.com; institutional ownership as a percentage of public float -- excluding shares held by insiders -- is even higher. These volatile stocks carry greater risks than most. A stock with a beta measure greater than 1 means it is more volatile than the market. The beta range for these four stocks is 1.73 for Microsoft to 3.31 for Flextronics.

Many fund managers defend their ownership of these battered blue-chip tech stocks, saying the recent downturn has strengthened the leaders. But disproportionately large institutional ownership extends beyond the leaders. Volatile stocks such as wireless-semiconductor company SkyWorks(SWKS Quote), which sports a price-to-cash-flow multiple of 131 and a beta of 2.7, and software developer Citrix Systems(CTXS Quote) have institutional ownership greater than 55%. Both stocks have more than tripled from their summer lows, partly because of improved outlooks; Dennis says heavy institutional ownership -- on the long and short side -- can help explain why these stocks have been so volatile. Institutional ownership still runs fairly high even at troubled companies such as Nortel Networks(NT Quote); money managers own 44% of the networker.