Ron Baron, the high-profile small-cap mutual fund manager, is hoping to improve the returns for one of his funds by dropping the income portion of the fund's investment objective.
The Baron Growth & Income Fund will ask shareholders to vote on May 19 to make changes which would turn the fund into a pure growth fund. The fund's trustees said in a proxy statement filed with the Securities and Exchange Commission March 12 they were recommending the move to take advantage of investment opportunities in small-cap growth companies, investments Baron believes offer better prospects than income-oriented companies.
In addition, the income objective "doesn't fit in well with our style," said Linda S. Martinson, general counsel for Baron Asset Management.
Small-cap investment has been Baron's forte. The Baron Asset Fund, with about $6 billion in assets under management as of Jan. 31 according to Lipper, and the $519 million Baron Small Cap Fund, have been popular with registered investment advisors looking to invest a portion of their clients' funds in the small-cap sector. The Asset fund ranked sixth out of 221 funds over five years, according to Lipper. Both the Asset and Small-Cap funds are sold without sales charges.
Dropping the income objective for growth and income made sense, said Ron Roge, an investment advisor in Bohemia, N.Y. whose clients have a total of approximately $6 million invested in the Asset and Small-Cap funds. Small-cap stocks are cheap by historical standards, Roge said. And many growth and income funds are drifting away from income investing, Roge said.
"Growth and income funds today tend to be more growth than income," Roge said.
Income-oriented funds invest in companies whose managements plan to use earnings to pay high dividends. Growth funds look to buy the securities of companies whose stock appears likely to increase in value.
Investors increasingly do not want a fund with a mixed investment objective, preferring to allocate their assets among separate growth funds and income funds, according to the Growth & Income SEC filing. In addition, Baron Growth & Income has invested in real estate investment trusts (REIT) to provide its income component. Baron believes that the potential returns now are greater in small-cap growth companies than in REITs, according to the SEC filing.
The proposed change in investment objective comes after a year in which Growth & Income had mixed performance. The four-year-old fund lost .39 percent last year, according to Lipper. The performance placed it 627th among 780 growth and income funds, according to Lipper. The fund's three-year return places it 319th out of 488 funds, Lipper reported. Growth & Income had approximately $339 million in assets as of Jan. 31, according to Lipper.
Roge said Baron told him more than a month ago that he was contemplating a change in Growth & Income. Roge suggested Baron add a large-cap fund, a suggestion Roge rejected as inconsistent with his firm's expertise.