Franklin Small-Cap Growth Fund Tries Hand at Livin' Large(r)

After buckling a bit under its mammoth asset base, the nation's biggest small-cap fund is broadening its menu, changing its name and opening its doors.

On Sept. 1, the broker-sold (FRSGX Quote)Franklin Small-Cap Growth fund, whose $11 billion in assets dwarfs its average peer's $315 million, will change its name to the Franklin Small-Mid Cap Growth fund and open to new investors. At that point the fund's co-managers, Edward Jamieson and Aidan O'Connell, will also be able to invest in companies with market caps as high as $8.5 billion, up from $4.9 billion.

Shareholders who bought the fund for pure exposure to small-cap stocks might have preferred it close before April 30 last year. The fund's big asset base seems to have forced its managers to focus on stocks of bigger companies, holding the fund back in recent years.

The fund industry's rule of thumb with small-cap funds is that once they grow to $1.5 billion or $2 billion, their size hurts them in the thinly-traded small-cap market. The idea is that a fund manager with billions to invest has a tough time building or unwinding a significant position quickly without moving its price and hurting returns.

The fund built a solid track record after its 1992 launch, but it trailed its average peer in 1997, 1998, 2000 and so far this year. The fund's 35.7% loss over the past 12 months lags 57% of its peers, according to Morningstar.

Despite its name, the fund already had a mid-cap growth label from Morningstar because many of the stocks in its portfolio were mid-caps. The fund's portfolio had a median market capitalization of $1.9 billion, compared with $1.4 billion for its average peer.

Investors eager for small-cap exposure might check out the Franklin Small Cap Growth II fund, which also has Jamieson and O'Connell at the helm and conveniently launched the day its sibling shuttered to new investors.

Of course, that's probably not much solace to fund investors whose small-cap fund morphed into a small- and mid-cap fund long before its name changed. I know something about how that might feel since the fund is the small-cap option in TheStreet.com's 401(k). Yes, I own shares.

For a look at some small- and mid-cap growth funds that have consistently trumped their peers, check out this Big Screen.