Fund name: Baron Retirement Income Fund (BRIFX)

Objective: The fund seeks capital appreciation. It pursues its goal by investing, mostly, in small- to mid-cap US stocks which the manager expects might double in value over the next five years. In particular, the manager looks for niche companies with defensible economic or competitive advantages, good management, happy employees and good reputations. Really. The fund can also short stocks, invest in private equity placements and invest internationally. Up to 100% of the fund might be international but only 25% can be international stocks not traded through ADRs or GDRs.

Adviser: BAMCO. BAMCO is the asset management arm of Baron Capital Group. Baron advises six other U.S. mutual funds and two Irish ones, as well as providing investment services for high net worth individuals. They’ve got about $20 billion in assets under management.

Manager: Ron Baron, founder, CEO, chairman and principal owner of the adviser. Mr. Baron began as an analyst in 1970, founded Baron Capital Management in 1982 to provide investment advice to rich folks, and launched Baron Asset fund (BARAX) to provide investment advice to po’ folks. He’s also got a B.A. in Chemistry and worked for a while as a patent examiner. He tends to show up on lists of "investing legends," "money masters," "gurus" and the like. Mr. Baron also manages Baron Partners, Baron Growth and a couple clones.

Management’s Stake in the Fund: Mr. Baron has more than a million invested in each of the Baron funds and he and his family own about 50% of all shares of the Baron Retirement Income fund.

Opening date: June 30 2008 for the fund, May 31 1996 for the preceding limited partnership.

Minimum investment: $2,000 for regular accounts, $500 for accounts with an automatic investing plan.

Expense ratio:1.35% on an asset base of $75 million.

Comments: Baron Retirement Income is the latest example of a fund styling itself after a university endowment fund. College and university endowments are the ultimate long-term investment vehicle, since the institutions they support may last for centuries (Harvard has been around 372 years while the University of Bologna has been in operation for 920 years). An endowment’s core obligation is to support a university’s operation by providing a predictable stream of real income; that is, income which grows at a rate faster than the rate of inflation. University endowment committees typically target a payout of 4 to 5% of the endowment’s value and inflation averages around 3%, so in the long term (just to stay even) endowments must earn 7 to 8% per year. Since cash grows only about 1% more than inflation and bonds only about 2% more, neither of them is capable of serving as the core of a university’s endowment. Most endowments are heavily invested in stocks or alternative investment classes.

Baron applies the same logic in designing this fund. "Retirement" used to define a fairly short period between the end of full-time employment and death. Indeed, Bill Bernstein suggests that German Chancellor Otto von Bismarck (1815-1898) originally picked 70 as the age for civil servants to begin collecting a state pension because it would be conveniently close to their expiration dates. In such a world, bonds were a perfectly sensible option since you wouldn’t be around long enough for inflation to seriously erode the purchasing power of your income. Now, of course, "retirement" may well define a period of 30-40 years. By Baron’s estimate, "inflation will likely cut the purchasing power of fixed-income assets in half every 15 years. Since at least one individual of every couple approaching 60 is likely to live another 30 years, we think this is not an attractive result."

Baron Retirement Income will invest in small- to mid-cap growth companies, both in the U.S. and abroad. It has the capacity to short stocks, though in practice Baron rarely exercises that option. The fund will automatically pay out 4% of its net asset value each year, though investors can elect to have that money reinvested in the fund. In particular, every fall it will pay 4% of the NAV from the preceding December 31^st. The plan is to generate enough capital appreciation that the fund will be able to consistently outpace inflation while still paying out 4% annually.

The management will go to great lengths to make that payout as tax-efficient as possible. They expect that the fund’s distribution will "be largely tax-advantaged, long-term capital gain or return of capital." Which is to say, they don’t intend to generate dividend income or short-term capital gains but they may actually return part of your original investment to you if there’s not enough long-term gain to generate a 4% payout.

Yikes, that’s a profoundly unattractive option.

Fortunately, there’s some reason to believe that Mr. Baron will be able to avoid returning capital too frequently. Like the Baron Partner’s fund, Baron Retirement Income had a long and profitable life as a hedge fund before transforming itself into a mutual fund. That fund, operating under the handicap of higher expenses but with lighter regulations, decisively outperformed its benchmarks:

That’s pretty typical for this group. All of the Baron funds have five-year records at or near the tops of their respective peer groups.

Mr. Baron’s logic and execution are both impeccable. He’s managed three other mutual funds – Baron Asset, Growth and Partners – with great success. There are, however, three major concerns that investors need to confront:

Bottom Line: Mr. Baron is a very good growth investor. Since all of the Baron funds have essentially the same expense ratio, folks interested in accessing Mr. Baron’s talents might well decide that BRIFX’s small asset base and huge management investment should tip the balance in favor of investing here. Oddly, though, your single riskiest decision might be taking the name too seriously, and committing to this as your retirement income fund.