Few people have ever accused money manager C.K. Lawson of being scared. He stares down crocodiles, hippos and other big game on wild safaris all over the world. And when it comes to investing, Lawson has bucked conventional wisdom for 40 years. Back in 1974, when few people wanted anything to do with stocks, he bought shares in coal companies, oil refineries and uranium miners, and he made investors a small fortune.

But for a bold, brave Texan, Lawson has been awfully hesitant lately. Ever since the crash, he says, he s been adding more names to the list of stocks he d like to buy for the $13 million Armstrong Associates fund he manages. Yet instead of buying them, Lawson has pushed 30 percent of the fund s assets into cash, the most he s held since the early 1970s. He says he s not scared, just worried the market will tank again. You don t need to hit the home run, but you don t want to strike out, he says, noting that the strategy limited the pain of the crash last year. But in 2009 all the cash hoarding also turned Lawson s shareholders into mere spectators to the fiercest stock rally in decades. In all, Armstrong Associates investors saw their fund rally barely half as much as the broader market. Those stocks he was interested in? One of them zoomed up almost 50 percent without him.

The mutual fund industry is built on the idea that professional investors, unlike ordinary folks, won t let fear get in the way of rationally investing in stocks. The pros, we re told, will thoroughly analyze stocks and buy them with conviction, even when individual investors want to panic-sell and stash money in their mattress. But it turns out that in the wake of the greatest crash since the Great Depression, many fund managers have been acting like, well, the average investor, hoarding cash, running from risk and costing shareholders billions in missed opportunities. In what amounts to a race to the middle of the pack, many large-company stock funds are paring back investments to make their funds look safe compared with their competitors and their benchmark indexes. From modest-sized funds like Lawson s to bigger players like the $2.5 billion Brandywine Blue, funds that traditionally put almost all their money in stocks have stayed on the sidelines, collectively sitting on billions of dollars in cash.

Of course, some of these managers would have looked like geniuses had the market kept falling. And some have recently stormed back into stocks. But by staying in cash for so long, many managers were, in effect, telling investors one thing describing a market full of must-buy bargains and doing something else. And the timing couldn t have been worse: Just before the market rallied this spring, 41 percent of professional money managers admitted they were overweight in cash, according to the Bank of America Merrill Lynch Fund Manager Survey. That s the second-highest level of playing it safe in the survey s nine-year history. They were talking the talk but not walking the walk, says Michael Penn, the firm s global emerging-market equity strategist.

For their part, fund managers say some of this was beyond their control they needed extra cash on hand to pay off nervous investors who wanted their money back. And clearly, no fund manager wants to do worse than the market as a whole. But the price of skittishness can be heavy in the fund business, something investors may discover as they probe their most recent quarterly statements. At a time when they could have jump-started their recovery from last fall s devastating losses, some enjoyed only a fraction of Wall Street s windfall. Now they must wait for another rally. You can t risk missing the upside, says Jeff Keil, a consultant for the mutual fund industry.

That s a worse fate than avoiding risk.

To some degree, playing it safe has always been ingrained in the mind-sets of fund managers, who invest $4.0 trillion in stock fund assets. Funds have traditionally been measured against an index of stocks in their sectors, and to make sure they don t trail that benchmark, many managers wind up owning the same stocks in nearly the same proportions. Although some funds attract investors with short-term returns that blow their competitors away, those same funds tend to lose far more when they have poor years. Many fund managers, particularly ones who oversee huge pools of money, don t want to be seen as eccentric, says Jeremy Grantham, chief investment officer of asset management firm GMO and a longtime critic of the industry.

Playing it safe also reduces the odds of getting fired. In what was once an uncommon event, hundreds of fund managers have been replaced in the past year, including many who made and lost big money veering from the safe course. Case in point: As the manager of Fidelity Growth & Income, Tim Cohen ran one of the nation s largest funds, loading up on financial stocks, including Wachovia and Bank of America. When the sector tanked, the fund took a spectacular nosedive, from $31 billion in assets to just $6 billion last January. Fidelity replaced Cohen in January, and the fund has shifted gears. The fund now spreads out risks (it now has 200 stocks) and makes sure its largest holdings resemble the S&P 500 s. The fund s investors want steady, gradual outperformance, not blowouts, says James Catudal, the new manager. Fidelity and Cohen declined further comment.

But critics of fund managers say investors today also want something else: a chance to regain some of that money they lost, which even some of the industry giants haven t been able to do yet. In all, the Brandywine Blue fund, which invests primarily in large U.S. stocks, has lost about $1 billion in assets since last September. (A spokesperson said the fund s managers were frustrated that their assets rebounded only 17 percent during the spring rally.) With few exceptions, by clinging to the mimic-the-index approach, most funds rode the market to its very bottom last fall. It was, after all, a rational move, since selling stocks during a decline essentially seals in losses before any stocks go back up. But many managers eventually wound up selling shares anyway. And according to a review of hundreds of stock funds by Smart-Money, many of them parked the proceeds in cash instead of following the textbook investment strategy of buying stocks at low prices. In fact, mutual funds as a group were holding 20 percent more cash this spring than they did a year ago.

Sensing a rebound in the market, some managers did shift back into stocks, but trying to time a rally is hard even for the pros. According to Morningstar, while stocks rose 38 percent from mid-March to mid-June, nearly one-third of 2,000 domestic stock funds did worse than the S&P 500 over that stretch. If they underperformed during both the bear market and the rally, you have to start wondering if the manager has the talent to manage your money, says Jeff Tjornehoj, a senior research analyst at Lipper, a mutual fund research group.

In their defense, some managers say it was panicky shareholders, not their own fears, that forced them to build cash positions. Without sufficient cash, the funds couldn t pay all those investors who pulled money out in the fall and were threatening to do so again. But such so-called redemptions were hardly an issue for Harvey and Daniel Neiman, the father-and-son investing team who run Neiman Large Cap Value. After getting a coveted five-star rating from Morningstar, the Rancho Santa Fe, Calif. based fund attracted a flood of new money from investors in the winter. But they sat on much of it. With 30 percent of its assets parked in cash, the firm posted only a 14 percent gain during the three-month run in the spring, 24 points behind the market. We couldn t just take the money and invest it while the market was falling apart, says Harvey Neiman.

To their credit, the Neimans have made no secret about their conservative style and their concerns about the market; it s in their letters to shareholders. But other fund investors with huge cash holdings have been sending mixed messages. Financial radio personality Gabriel Wisdom encouraged shareholders to buy fear last summer because stocks were so cheap. But the Fallen Angels Value fund, which Wisdom manages, was holding 23 percent of its assets in cash at the time, and by the end of January it was sitting on 34 percent cash. Wisdom, who also is based in Rancho Santa Fe, says buying on fear and selling on euphoria is normally a good investing strategy, but last year s crash the sixth bear market he s managed money through made him pause. We didn t want to be heroes and guess the bottom, says Wisdom. (He did later buy some stocks and captured some of the rally, but his fund still has a large cash hoard.)

The FCI Equity fund, based in Kansas City, Mo., also sensed bargains in the crash, and it told shareholders last fall it was excited about the opportunities. It did do some buying then, but by the eve of the spring rally, it still had about 7 percent of assets in cash, a seemingly small amount but still more than triple the fund s normal cash position. By mid-June, the fund had missed out on about a quarter of the rally s gains and trailed the broader market. We missed on March. We should have been a buyer, and we weren t, says William Courtney, one of the fund s managers. The whole thing looked like it was collapsing.

5 Cash-Filled Funds

Why they kept so much cash

GABELLI ABC
SIZE: $334 million
PERCENT IN CASH: 9/30/08: 26% | 3/31/09: 76%
This fund focuses on takeover targets; manager Mario Gabelli sold off stock when the crash put a halt to mergers. The fund lost less than 3 percent in 2008
but missed almost all of this year s rally.

WESTPORT FUND
SIZE: $188 million
PERCENT IN CASH: 9/30/08: 18% | 3/31/09: 23%
Normally holds 5 percent cash, but these aren t normal times, says a fund spokesperson. Westport s returns have lagged behind its midcap peers this year.

MARATHON VALUE PORTFOLIO
SIZE: $30 million
PERCENT IN CASH: 10/30/08: 6% | 4/30/09: 13%
The fund lagged about 12 points behind the S&P 500 in the rally but lost less in the crash. Manager Mark Heilweil says the bear market isn t over yet and that he wants a cash cushion.

FPA CAPITAL
SIZE: $1 billion
PERCENT IN CASH: 9/30/08: 38% | 3/31/09: 31%
Last year the managers said they were observing a buy halt. This year they ve bought energy stocks, but in midsummer the fund still had a huge cash hoard.

NEIMAN LARGE CAP VALUE
SIZE: $14 million
PERCENT IN CASH: 9/30/08: 31% | 3/31/09: 41%
Typically holds no more than 20 percent cash, but has put that guideline aside. Comanager Harvey Neiman says today s market merits being conservative.

SOURCES: SECURITIES AND EXCHANGE COMMISSION; FUND MANAGERS