Democracy is a great concept. When people are allowed a say in matters that directly affect them, outcomes are more likely to reflect the interests of those people. This idea also holds true when it comes to investing; after all, that's what shareholder votes are for. But one firm is making a substantial change to one of its most popular mutual funds -- without clearing it through the fund's investors.

Small-cap quandary
The FBR Small Cap Fund (FUND:FBRVX), run by Friedman Billings Ramsey Group, has attracted a lot of attention in recent years, and with good reason. The fund has posted a five-year annualized return of 24.7% through July 2007, landing it close to the top of its small-cap fund peer group for that period. This strong performance has helped boost assets and attract new inflows into the fund over the past several years. Net assets at FBR Small Cap now exceed $1.6 billion.

But as is the case with many successful small-cap funds, a streak of great performance and increased inflows have brought new problems. Successful small-cap investing requires that a manager stay nimble and be able to move into and out of small stocks with ease. A heavy asset load makes that job much more difficult because there is more cash that has to be put to work in stocks with a limited market capitalization. If management cannot identify enough attractive small-cap opportunities, cash reserves can build up. That has been the case at FBR Small Cap, where roughly 30% of the portfolio's assets are currently sitting in cash.

An all-cap solution
To solve the fund's cash problem, FBR recently announced that it will lift the fund's market cap limitations, essentially re-creating the fund as an all-cap strategy. The fund will be renamed as the FBR Focus Fund. Fundholders can now expect to see more investments made in the mid- and large-cap space. Of course, the fund had begun to creep into mid-cap territory, as evidenced by the fund's $3.5 billion average market cap. Additionally, roughly two-thirds of the fund's holdings are now in mid- and large-cap stocks such as Penn National Gaming (NASDAQ:PENN), American Tower (NYSE:AMT), and Markel (NYSE:MKL).

FBR is making this strategy change without putting it to a shareholder vote. There is no legal requirement for it to do so, but it would be a wise move to consider fundholders' wishes. For example, it might make more sense for FBR to close the Small Cap Fund to new investment and open a separate fund that encompasses the all-cap strategy. But FBR has apparently made its decision and will make these changes to the fund in the near future.

Looking ahead
What does that mean for investors in the FBR Small Cap Fund? Well, it is certainly disappointing that FBR is not vetting the mandate change with fundholders. And it doesn't exactly warm my heart that FBR changes an investment process that has worked spectacularly well just so it can take in more money. The biggest issue for investors to consider is that this fund may look substantially different going forward. The folks who bought into this fund expecting it to provide them with exposure to the small-cap market could now have a problem.

If you have a spot in your portfolio for an all-cap growth fund that will likely lean heavily into the mid-cap space, this fund could still work for you. Just realize that the fund's track record may not indicate how it will perform in the future, because the fund's composition will likely change. But if you don't have any other exposure to small-cap stocks, you might consider selling and reallocating your money to a smaller fund that invests more directly in this segment of the market.

Overall, I would have been more comfortable with this change if FBR had put the matter to fundholders for a vote. But that didn't happen. At any rate, investors should always be wary of changes in a fund's strategy because such changes often end up as a signal to sell the fund.

When you decide whether to hold on to this or any mutual fund that makes a significant process change, make sure you understand exactly what is changing and how that change will affect your investment going forward. And that's something you can take with you to the voting booth.

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Fool contributor Amanda B. Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. The Fool's disclosure policy does not support taxation without representation.