The Times Versus Ron Baron
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Wednesday, January 03, 2018

The Times Versus Ron Baron

One of Ron Baron's hometown papers gave him an unflattering end-of-the-year send off over the weekend.

The New York Times attacked the billionaire Baron Capital [profile] founder over mutual fund fees. The paper accuses Baron Funds of charging "some of the higher investment fees around," lumping the $26.4-billion fund family into the broad trends the Times says are stifling downward fee pressure on mutual funds, trends like "quiescent mutual fund boards, complacent investors and a general unwillingness to call a halt to one of the great gravy trains in financial history." Ouch!

Here are some of the paper's charges:

  • The Times calls out Baron's flagship, the $6.3-billion Baron Growth Fund, for charging fees "a higher than the median level for similar funds." Apparently mutual funds should live in a kind of bizarro Lake Wobegon, where all the fees are below average ... The paper also dismisses Baron's argument "that his skills and experience — and the arduous task of researching small growth companies — justify the fees."

  • The Times measures Baron Growth unfavorably based on recent yearly performance (except for 2017, in which it beat the S&P 500). Yet the paper also notes that Baron himself is "an old-fashioned stock picker" and that he thinks "the true measures of his success is performance since his fund's launch in 1994," which, as the paper notes, handily outpaced the S&P. "He frequently sticks with his top picks for decades," the paper notes.

  • The paper wonders why Baron himself is paid compensation that is partly based on how much fees his funds bring in. In other words, Baron, the largest shareholder in his own fund company, receives an asset-based fee (well, a fee based on an asset-based fee, which becomes a different asset-based fee) much like any mutual fund company itself. If he didn't personally receive that fee and put it back into the company, the company could then pay it out as dividends to the shareholders ... and since he's the biggest shareholder, the biggest slice would go to him. The bottom line is that any fund company effectively receives compensation, through dividends or company growth or something, that are based on the total amount of fees the company brings in, which in turn is based on the fees it charges and the AUM it charges them on.

  • Citing Chicago-Kent College of Law professor William Birdthistle, the paper wonders if the Baron Funds board is too reluctant to push back on fees. Yet Birdthistle and the Times dismiss the common board logic that investors who don't like the fees can walk, selling their shares, and invest in something with lower fees if they so choose. And given the massive net flows out of active equity mutual funds and into passive funds last year, it seems that many investors can and do make that choice.

The Times piece is long and does contain interesting tidbits about Baron himself, the company, and about his famous annual investor gala at Lincoln Center, which back in November featured CEOs like Walt Bettinger of Charles Schwab and celebrity performers like Chris Rock, Tim McGraw, and Faith Hill. As the paper notes, "nobody complained about the fees" at the bash, which is paid for by Baron himself and is free for Baron Funds shareholders to attend.

Baron is personally worth "just over $2 billion", according to a Forbes estimate cited by the Times, and he says that he and his kids "have over $670 million invested" in his own mutual funds. Why would he overcharge himself, given that plenty of the fund fees go to the company and to his other employees, not to himself? He says that his mutual funds have generated $23.6 billion in investment returns for his clients, presumably net of fees since that's how mutual fund returns are reported. So his net worth is 8.5 percent of the returns he's brought to investors, which is a far cry from the "two and twenty" (i.e. two percent of AUM and 20 percent of gains) that hedge funds traditionally charged their investors. And Baron even throws in one heck of gala every year.

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