A Generational Change at Baron Asset

A lot of mutual fund managers claim to invest for the long-term, but few do so with the same tenacity that Ron Baron does at his eponymous Baron Asset fund.

Baron loaded the fund with Wynn Resorts (symbol WYNN) in 2002 even as the casino operator's initial public offering met with skepticism on Wall Street. Even as the stock was falling 17% from its IPO price, Baron continued to buy more shares, expressing confidence in chief executive Steve Wynn's managerial prowess. Today, Baron Asset has 4.4% of its assets in Wynn Resorts, which has gained more than 850% since its IPO.

The long-term focus has helped produce fine returns at Baron Asset (BARAX) since its launch nearly 21 years ago. Since the fund's inception in June 1987, it has returned 12.4% annualized. That compares with 10% annualized for Standard & Poor's 500-stock index and 11.8% for the Russell Mid-Cap index.

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But there has been a generational passing of the torch at Baron Asset. Ron Baron recently gave full stewardship of the fund to Andrew Peck, who has been co-manager since July 2003 and an analyst at the fund since 1998.

As Peck says of his preparation for the role: "For better or worse, I've been trained for the last ten years to think and act like Ron." Fair enough, but only time will tell if he can bring the same prescience and creativity to stock-picking as the fund's namesake.

Stock-picking is an intuitive business at Baron Asset and, indeed, all of the Baron funds. Analysts drum up investing ideas from industry trade shows and corporate events, focusing on stocks with market capitalizations of between $2.5 billion and $10 billion.

Peck describes the ideal holding as a company he believes can double in size over the next four years, and one that is "led by what we perceive to be excellent management teams, with meaningful barriers to entry." To build confidence in a company, site visits by Baron analysts and meetings with executives are essential.

Peck says he'll sell a stock once he no longer believes it has the potential to double in four years. The fund often holds stocks for five to ten years.

That long-term view often leads to performance that's out of sync with the market. "The market isn't interested or willing to make an investment today based on what something can become four or five years in the future," Peck says.

In high-octane years such as 2003, when the Russell Mid-Cap Growth index soared 43%, Asset gained 27%. But long-term it's a winner. Over the past five years through February 29, Asset returned 17.4% annualized, beating 84% of its peers and edging the Russell index by an average of 0.3 point per year.

Although Peck focuses on growth stocks, he rarely invests in technology companies. "It's very difficult to look out four to five years and have a strong conviction that a tech company that may be a leader today will be able to maintain that lead," he says. He also avoids companies that are tied to closely to the ups and downs of the economy and that depend on rising commodity or material prices.

Peck is keen on financial exchanges. Exchanges, he says, tend to evolve into monopolies. He adds that the transition from floor-based to electronic trading has boosted profitability throughout the industry.

The Chicago Mercantile Exchange (CME), at 4% of assets, is the fund's third largest holding. Although Peck cannot exceed a 10% stake in foreign investments, he recently added two Brazilian exchanges: Bovespa, an equities exchange, and Bolsa de Mercadorias & Futuros, a derivatives market.

Ron Baron stays on as CEO, chief investment officer, and manager of two other Baron funds, Baron Partners (BPTRX) and Baron Growth (BGRFX). Baron Asset charges 1.34% in annual expenses and requires a $2,000 minimum initial investment.