A literature fan who met Ron Baron, the 68-year-old founder of mutual fund family Baron Funds, might be reminded of Voltaire's fictional character Candide -- the incorrigible optimist who lived "in the best of all possible worlds." Baron's perch on the 49th floor of the GM Building in New York is an open, airy and museum-worthy parallel universe dominated by bright and cartoonish Roy Lichtenstein paintings, gigantic and playful Alexander Calder mobiles and a glass-walled conference room where colorful fish swim in mural-size aquariums. (Adding to its otherworldliness is that it is one of Manhattan's highest-priced commercial properties.) After giving a visitor a tour of the collection, Baron heads down a flight of stairs, pausing by his indoor koi pond and gesturing across the marble expanse where his company is staffing up -- with $17 billion in assets already, Baron is on the hunt for more customers.Inside the June Issue
- Annual Broker Survey
- The Sibling Sinkhole
- In Deep: Billionaire Fund Manager Ron Baron
- 10 Things Hollywood Won't Tell You
Settling in for an interview, Baron displays a bright disposition that reflects his office view, an optimism that begins with his view of the market -- "stocks are the cheapest I've seen in my life," he says -- and extends far beyond. Sitting in a rocking chair that he says once belonged to John F. Kennedy, he tells a long story about the former president and Marilyn Monroe, and muses on a recent meeting he had with a portfolio company executive. "What a fun business I have, where I get to meet all these interesting people," says Baron. Indeed, those interesting people also include stars like Sting and Hugh Jackman, the headliners at the celeb-studded conference he held last November in Lincoln Center's Metropolitan Opera House. In an industry where understatement of wealth is the norm, events like this show how much he stands out: If money managers resemble a row of black Lincoln Town Cars, Baron is the yellow Lamborghini. It's quite possible he's the happiest money manager too. "How could you not be optimistic being in this country? And having these opportunities?" he asks.
And who could be surprised by Baron's sunny attitude, at least if you adopt a 30-year view of his now-legendary career? The fund shop he launched in the late 1980s built a stellar reputation in small-cap "growth" investing, focusing on fast-rising stocks and riding them to impressive performance numbers. A $10,000 investment 15 years ago in Baron Growth, the fund Baron has managed the longest, would be worth $43,000 today, twice as much as a similar investment in Standard & Poor's 500-stock index. In all, the performance puts Baron Growth in the top 15 percent of stock funds in its category, and the fund's success has helped make Baron a billionaire.Ron Baron
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Baron says that most of his customers don't care about his funds' higher-than-average expenses, as long as he delivers good returns. "We are not trying to be Wal-Mart."
But as bright as the outlook may have seemed in, say, 1998, it's now 2012, and the past few years have been a grimmer story. Since 2007, Baron Growth has been just about even with its benchmarks, and other funds in his family are also mediocre performers. Most money managers, of course, have struggled to thrive since the financial crisis. Baron's bad times, however, look even gloomier compared with his high-flying past, and investors are voting with their feet: Shareholders have withdrawn money from Baron Funds more than three times as fast as they have from stock funds in general. And critics, including some former customers, are questioning Baron on everything from his strategy to his fees -- one thing about his funds that still ranks near the top. "He seems willing to kill the goose that laid the golden egg," says Chris Davis, Morningstar's senior mutual fund analyst.
Baron says his clients don't mind paying up for his services, and he attributes most of his performance problems to investing errors he made during the worst of the crash. Indeed, he thinks his namesake firm is positioned for even greater things, and he's aiming to capture a bigger share of the multitrillion-dollar 401(k) business. "I am paying the price but getting back on track," he says. That's about the response you'd expect. After all, as the story goes, Voltaire's Candide maintained his optimistic view even as he endured the Spanish Inquisition. But Baron watchers can only wonder: Is he right this time?
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Question Baron's upbeat take on life and the markets, and he'll respond with his own Horatio Alger like story, one that digresses to include the Holocaust, the Jewish diaspora and a lucky-to-be-American patriotism. He grew up in Asbury Park, N.J., in humble circumstances, and says he started with "negative net worth," because he borrowed money for college and law school. Today, he's worth $1.5 billion and lives on an East Hampton property that cost nine figures in 2007. Reports at the time said he bought it for $103 million, but he's quick to correct a reporter: It was actually $132 million.
Baron carved a path to that wealth with savvy stock picking. As a salesman pitching stock ideas to money managers in the 1970s, he developed a reputation for canny calls on small, unloved companies. Realizing that his ideas were making others rich, he started his own money-management firm in 1982, and in 1987 he launched his first mutual fund, Baron Asset. Even during a long bull run in which investors had the wind at their backs, Baron's performance stood out, aided by investments in entrepreneurs like Ralph Lauren and casino magnate Steve Wynn. Between 1988 and 1998, Baron Asset racked up returns of 34 percent or more in four different years. He mostly avoided the tech-stock run-up and the 2000 crash, a feat that helped him rise to the top of the performance charts. And in 2004, another of his funds, Baron Partners, was the top-ranked fund in the entire industry, with a 42 percent return.
There were blips along the way, of course -- some of which foreshadowed challenges to come. Baron built his early success with "concentrated" funds that owned just a few stocks he knew intimately. As his growing reputation lured more money, Baron had to choose between buying more stocks and building bigger stakes in stocks he already owned. He chose the second path, and by 2000, his funds owned a hefty stake of around 30 percent in the auction house Sotheby's. But when Sotheby's was implicated in a price-fixing scandal, its stock cratered, and Baron's clients lost more than $250 million in just a few weeks. (Today, Baron explains, no new investment can account for more than 10 percent of any of his funds.)
Trying to combat the headaches of growth, Baron closed a couple of funds to new investors in the mid-2000s. But he soon reversed himself, reopening them: Stocks of all kinds looked cheap to him then, he says, and he couldn't take advantage of them if he stuck to a small-fund mentality. Certainly, the expansion gambit worked: By the end of 2006, his firm managed $17.3 billion, about 60 percent more than it held in 2004. And more assets, of course, meant more management fees for Baron; by 2007, he had cracked Forbes's list of the 400 richest Americans. "I am blessed," says Baron.
Baron now has a staff of 114, nearly twice what he had in 2006, and he's added four funds to the roster in the past five years. A company that was once a small-cap specialist today has value and international funds, real estate and natural resource funds. And Baron envisions growing much bigger, bringing in assets from every source. "Retail funds, employee plans, 401(k)s, pension and profit sharing, high net worth -- all are important," he says effusively. Leaning back in his JFK rocking chair, Baron says he's itching to talk with Edward "Ned" Johnson III -- founder of Fidelity Investments, the $1 trillion titan that dominates the retirement-fund world. Reaching such proportions would mean growing Baron Funds' assets almost 60-fold, a more ambitious goal than even Baron admits to -- he says doubling in 10 years is more reasonable.
But meeting even that goal could be a double-edged sword. To date, going big hasn't been great for Baron's shareholders. Indeed, as Baron has become more baronial -- staffing up, building his personal wealth -- performance, particularly of the funds he manages himself, has suffered. Baron Growth has sunk to midpack status, trailing the S&P 500 by more than three percentage points over the past year -- and that's not the only marketing problem it faces. Ten years ago, three-quarters of the stocks it owned were small caps with a market value of $2 billion or less. Today, the fund is eight times as big, and only 35 percent of its stocks qualify as small. The result: In 2011, Morningstar changed the fund's designation from small-cap to midcap. That distinction could cost Baron millions of dollars in business, retirement-plan experts say, because the midcap category is far less popular than small-cap funds among plan organizers. (Baron says he strongly disagrees with the change; his company still markets Baron Growth as a "small-cap growth" fund.)
Baron Partners, the former top-ranked fund, has faced even rockier times. The fund's rules allow Baron to use leverage, borrowing money to goose his exposure to stocks he loves; he can make investments worth as much as 133 percent of the assets in the fund. Unlike other leveraged managers, Baron doesn't short stocks, or try to profit when they fall. "I don't want to benefit from people losing their jobs," he says. But when markets go against a leveraged position, the losses are amplified. In 2008, for instance, Partners was down 47 percent, 10 percentage points worse than the broader market. (Over the past five years, the fund lost money while the market was flat; over the past year, the fund trailed the market by eight percentage points.) Baron says his mistake was buying lower-quality stocks during the worst of the crash: "I screwed up," he says. In a 15-year period, Baron says, Baron Partners and Baron Growth still outpaced the market; and he avers, "I'm going to be right again."
Not all of Baron's customers, however, will wait for that day. Since 2007, Baron Partners lost 32 percent of its assets to client withdrawals, while investors pulled nearly 15 percent out of Baron Growth. Some of the shift has been part of a general equity phobia among investors, and that's what Baron attributes the withdrawals to. But the exodus has been more pronounced at Baron Funds; the company as a whole suffered an outflow of 18 percent of assets over the past four years, while overall, U.S. stock mutual funds reported only a 6 percent decline, according to Morningstar. Among those abandoning ship is Art Cohen, a Chicago financial adviser who oversees $400 million. Cohen is in the process of pulling 80 client accounts he has had for around 10 years with Baron Partners. By making big leveraged bets, Baron is "in effect saying 'I know better than everyone else,'" says Cohen, whose clients are no longer comfortable with that risk.
Another factor that's weighing on customers: Baron's fees are among the highest in the mutual fund industry. The annual expenses on the Baron funds range from $130 to $170 per $10,000 invested; the industry average, according to Morningstar, is $110. Typically, as funds grow larger, economies of scale kick in, and some savings are passed on to shareholders. But Baron Growth, with about $6 billion in assets, still charges $130 per $10,000. Baron Funds has never reduced fees on its funds, though, like most fund companies, it does offer some reduction for customers who invest $1 million or more. Baron's fees were more justified when his funds were smaller and performed better, according to Morningstar's Davis, but now "they are tougher to stomach."
For some customers, Baron's spending can also be hard to swallow. Baron Funds' space in the GM Building costs an estimated $150 to $170 per square foot in rent, or more than $6 million a year, according to Neil Sroka, president of real estate firm Douglas Elliman Worldwide Consulting. The investment conference also costs multiple millions: Hiring the likes of Sting, Elton John and Stevie Wonder (all recent Baron guests) can have a $2 million price tag; renting Lincoln Center's Avery Fisher Hall or the Metropolitan Opera House is another $100,000 proposition. Baron prefers not to comment on what he spends on his conferences, except to say that the cost of the entertainment comes out of his own pocket. He admits: "It is not inexpensive." Cohen's rejoinder: "It's all paid for by me from his high management fees."
Based on a rough breakdown of his fees, Baron Funds' $17 billion in assets produces an estimated $190 million in annual revenue. If the company had charged the industry average, it would have brought in closer to $165 million. Could Baron skip the frills and simply pass the $25 million difference along to shareholders in the form of lower fees? Baron contends that most people don't care about the price tag. "We are not trying to be Wal-Mart," he says. "If people want low fees, they can go to Vanguard."
If people want unbridled enthusiasm for stocks, on the other hand, they can stick with Baron. He has never met a market he didn't like, and the current one is no different. His reasoning: In the past decade, the stock market has barely moved the needle, yet companies' earnings have "gone up tremendously." Where stocks as a group historically have traded at around 15.5 times earnings, they are now trading at around 12 times, by Baron's estimation, while using low interest rates to borrow and expand. He ticks off stocks he's falling in love with: electricity company ITC Holdings, hotelier Hyatt. Once investors lose their skittishness about stocks, he says, 1990s-style returns could come back: "We are on the verge of this."
Buoyed by that optimism, Baron is adamant that even though he's at retirement age, he won't be getting out of the stock-picking game. Here, too, he cites Fidelity's Johnson as a role model: "Ned is 81 years old, and he loves to work, and he comes in every day," Baron says, citing intel he picked up from a country-club contact. In the presence of Baron's blend of enthusiasm and ambition, Candide comes to mind one more time: Voltaire's hero, at his peak, was swimming in gold and jewels. Caveat and spoiler alert: He eventually wound up a farmer -- much less wealthy, but still happy.