With Ron Baron of Baron Capital Group Inc.

Dec 19, 2005 @ 12:01 am

By David Hoffman

NEW YORK - Ron Baron does things a little differently than other money managers.

The 62-year-old president and chief executive of Baron Capital Group Inc. of New York, the parent of BAMCO Inc., adviser to the Baron Funds group, is not content to just manage money. He thinks it is important that his clients know how their money is being managed.

For example, he holds an annual conference for shareholders in the Baron funds that is part investor education seminar and part entertainment extravaganza.

During the last conference Nov. 11, speakers included chief executives from companies in which Baron Funds invest, such as Charles R. "Chuck" Schwab, chairman and chief executive of San Francisco-based Charles Schwab Corp.

But conference attendees also were treated to performances by Elton John, the Beach Boys and Lionel Richie. Mr. Baron started including entertainment at the meetings because he wanted to entice shareholders to come and hopefully learn something about the way their money was invested.

The fact that Mr. Baron is willing to go that extra mile to inform shareholders "really speaks to his dedication in trying to involve his shareholders," said Reuben Gregg Brewer, manager of mutual fund research at Value Line Inc. in New York.

He said that's one of the reasons - along with solid performance - why he is a shareholder in the $1.15 billion Baron Partners Fund.

But Mr. Baron's actions have not always won him accolades.

Mr. Baron, the affiliated broker-dealer of the adviser and two traders employed by the broker-dealer paid a total of $2.7 million in April 2003 to settle Securities and Exchange Commission charges of stock price manipulation.

"What he did was wrong," Mr. Brewer said.

But unlike instances of market timing for which a number of mutual fund companies have been punished, Mr. Baron's actions are mitigated, to some extent, by the fact that Baron Funds shareholders were not harmed, Mr. Brewer said.

Q. Has the current regulatory environment made it more difficult for a small firm like yours?

A. It's a great thing for me, because we are at a level where we can afford the costs [of compliance]. We have our clients, and they are talking to their friends about us. Our business is growing nicely. We have all these pension plans and 401(k) plans. We're now at a level that I think supports significant growth.

But I do think that the barriers to doing what we're doing have never been larger. It's hard to get to this level, but once you're at this level, it's great.

I wouldn't want to start one of these businesses now. Why would anyone? There are barriers, there are high costs. And how do you attract talent? The economics of being a hedge fund are better. Why would you want to be a mutual fund?

Q. But you have expressed dislike for hedge funds.

A. The problem is, they are not regulated, so they can do whatever they want. People don't know the securities in which they are invested. Until the bright light of regulation shines on them, they won't know.

Q. Do you think things will get better when new rules requiring hedge funds to register go into effect next year?

A. I think lawyers for private institutions are highly paid and will, in most instances, be able to navigate the rules that the government puts forth. If people don't want to be regulated, they won't be.

Q. What about your own plans for growth?

A.Our plan is to add more managers, more funds and more people. I expect within the next year or two we're going to add another fund. We're going to keep adding a fund every couple years, or every year, where we think there's an opportunity to provide an attractive service for clients of our firm.

Q. Where do you see those opportunities?

A.I don't really want to talk about where I see opportunities for funds before we decide to offer them. But international investing is an opportunity.

Q.Can you talk about your overall investment strategy?

A. We are long-term investors, and few others are. The average mutual fund turns over its portfolio 140% a year and owns stocks for only seven or eight months. Our funds on average hold stocks for five years and, in many instances, hold stocks for 10 to 15 years.

If your goal is to invest in a company that will grow a lot, and it grows a lot, you're right not to touch it. We invest for the very long term. And we invest in business that can grow a lot because they have these tremendous opportunities which are defined by megatrends.

Q. But most of the funds you manage are small- and mid-cap funds. By holding on to stocks for a long period of time, don't you run the risk of owning stocks that grow in capitalization size?

A.Yes. Mitchell Ruben [manager of the $76 million Baron Fifth Avenue Growth Fund] has written that a large percentage of the ideas that he invests in are businesses that we followed and invested in when they were small.

Q.Is that part of the reason you launched that fund in May of last year?

A.That's part of it. And partly it was because over the last five years, large growth companies had underperformed. We thought they were getting cheap and represented a good opportunity. We made [Baron Partners Fund] into a public mutual fund at a time when we thought it was attractive to do so. Of course, we've had other instances where we offered funds to the public at the exact wrong time.

Q. Could you give an example?

A. The [$141 million] Baron iOpportunity Fund was intended to invest in companies where there was an opportunity to benefit from the Internet. We brought it public in early 2000 to a thud. While we thought it was an opportunity, we saw the opportunity too early.

After that first stumble, it's now back to its initial net asset value, while most Internet funds have gone out of business.

Of course, right now we don't have a very large fund. But I do think long-term it has very exciting prospects and should do very well.

Q. You have built the assets in many of your other funds - specifically the $4.9 billion Baron Growth Fund, a small-cap fund. Do you think there is danger in letting a small-cap fund grow so large?

A. If you are a long-term investor, you can manage a significantly larger amount of assets than a short-term trader. And I think you can actually be a much better investor when you're able to have a very long-term horizon. You are able to attract and retain a much better portfolio manager when he's got more responsibility, more assets to manage.


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