Fund name: LKCM Equity (LKEQX)

Objective: The objective is maximum long-term capital appreciation. It pursues that objective by investing primarily in domestic stocks, in particular those likely to have above-average growth in revenue and/or earnings, above-average returns on shareholders’ equity, under-leveraged balance sheets, and potential for above-average capital appreciation. The primary strategy is to identify high quality companies based on various financial and fundamental criteria such as high profitability, strong balance sheets, competitive advantages, high and/or improving financial returns, free cash flow and reinvestment opportunities, and prominent market share positions.

Adviser: Luther King Capital Management Corporation, Fort Worth, Texas is the investment adviser. LKCM was founded in 1979 and provides investment management services to investment companies, employee benefit plans, endowment funds, foundations, trusts and high net-worth individuals. As of December 31, 2008, the Adviser had approximately $5.6 billion in assets under management. LKCM advises the five LKCM funds, four LKCM Aquinas funds which invest in accordance with Catholic doctrines, and the two Frost LKCM funds for a bank in Texas.

Managers: J. Luther King, Jr. and Steven Purvis. Mr. King is responsible for the day-to-day management of the fund and has been President, Principal and Portfolio Manager of the Adviser since 1979. Mr. Purvis has been a Vice President and Portfolio Manager of the Adviser since 1996 and Principal since 2004.

Management’s Stake in the Fund: Mr. King has over a million invested in each of Equity, Small Cap, Balanced and Fixed Income. Mr. Purvis has over $100,000 but under $500,000 invested in the fund.

Opening date: January 3, 1996.

Minimum investment: $10,000.

Expense ratio: 0.80%, after waivers, on assets of $40 million. There’s also a 1% redemption fee for shares held fewer than 30 days.

Comments: Here’s a quiet write-up for a quiet fund. I’ll write upon the theme, "The fox knows many things, but the hedgehog knows one big thing." That’s fragment generally attributed to the ancient Greek poet Archilochus who flourished somewhere around 650 B.C.E. People read it to mean something like, "having a million little strengths is fine, but one grand one might be better still." Better, we’d conclude, because the hedgehog defeats the fox’s best-laid plans with his one great ability.

As folks think about how to cope with risk and uncertainty, they likewise have a couple options. Foxes (or foxy funds) have a million plans: currency hedges, sector rotation, paired trades, tactical asset allocation, and so on. Many of which work, some of the time, and all of which cost. Hedgehogs pursue one strategy with great intensity.

LKCM Equity strikes me as a hedgehog. Here’s the story: it buys and holds high quality American companies. Period. High quality companies, from their perspective, have somewhat above average growth but much, much less debt than their competitors. They prefer industry leaders with definable, sustainable economic moats. They buy them. And then they hold them. The firm’s most recent estimate of turnover is 5.1%. Rough translation: hold them for 20 years, on average. Historically their turnover rate has been a bit higher but it has never exceeded 50% in a year and is typically half of that.

Like Matthews Asian Growth & Income, it has years of relative underperformance – 1998, 2003, 2004 all saw them in the bottom 20% of their large cap core peer group – but they tend to make solid returns in those generally frothy years. For the three years just cited, the fund returned an average of 14% year. And when the market subsequently tanks, the fund tends to rise back to the top – 2000, 2001, 2002, 2007 and 2008 all saw them in the top quartile of their peers. Overall, they lead their peer groups in every trailing period from 1- to 13-years. In the recent turbulence, that lead have been substantial.

Bottom Line: It’s not sexy, but it’s good. If you’re not willing (a) to pay north of 2% a year for a complex portfolio and (b) are reluctant to abandon the equity market, LKCM Equity offers the chance to enjoy the benefits of steady, disciplined investments targeting only first-rate firms. As I’ve said elsewhere, that has a lot going for it. I agree with Morningstar analyst Michael Breen’s conclusion (4/23/09): "The fund is built for tough times . . . overall the long haul, we’re confident this fund will continue to win out."