WOOF! WOOF! ROBERTSON STEPHENS MAY MARRY FREE-FALLING FUNDS: A DOG-EAT-DOG MERGER WEIGHED

In a move that is likely to leave many investors scratching their heads, Robertson Stephens & Co. may merge its Developing Countries Fund, a dog among emerging markets funds, into its small-cap value Partners Fund, which isn’t exactly a stellar performer either.

A spokeswoman for the San Francisco-based money manager says the firm has filed with the Securities and Exchange Commission to merge Developing Countries into Partners, but is also considering other options for the fund. However, she declined to comment further. The possible merger would take place by early September, according to a letter mailed to shareholders in July.

The letter, signed by Randy Hecht, president of Robertson Stephens Funds, says Developing Countries has been unable to attract enough assets to cover its costs and isn’t likely to do so soon, given the bleak emerging markets conditions.

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“In today’s market environment opportunities to profit from investing in emerging markets can come through other avenues, for example, investments in international companies with significant operations in emerging markets,” writes Mr. Hecht. “These companies often bring experienced managements to these markets that are many times sorely lacking in emerging market companies.” (Mr. Hecht did not return calls.)

The Partners Fund, according to Robertson Stephens, seeks long-term growth by investing in companies here or abroad with market capitalizations of up to $1 billion.

According to Chicago-based Morningstar Inc., the Developing Countries Fund lost 12.46% annualized between its inception in April 29, 1994, and Aug. 2, while its peers in the diversified emerging markets category fell 9.36%.

For the year ended Aug. 21, the fund plunged 46.95%, compared to a 42.10% loss for its peers.

In terms of assets under management, the fund peaked in February 1997 with $96 million in A shares, according to Morningstar. As of the end of July, its A share assets had shrunk to $12.5 million.

Although it was in the top 14% of its category in 1996, it has been hammered in 1997 and 1998 by large bets, including heavy exposure to the Asia-Pacific region, says Morningstar analyst Kevin McDevitt.

At the end of June 1997, for instance, the fund had about 20% of its assets invested in South Korea — about four times the category average for such investments.

“It has been a very concentrated portfolio,” says Mr. McDevitt, adding that holdings have been limited to only about 40 stocks.

“For emerging markets, that’s essentially unheard of. It is almost irresponsible because they are such illiquid markets,” he says, adding that the fund has sought to offset risk by periodically holding a lot of cash. For example, its cash position at the end of March was 39%, he says.

“Obviously it has been impossible to do well this year (in emerging markets), but even relative to its peers it has done poorly,” says Mr. McDevitt, explaining that the fund was down 20% through the end of July, putting it in the 90th percentile.

Still, he questions whether rolling it into the $99.27 million Partners Fund makes sense for investors.

“(Partners) has almost always been in the U.S. and sometimes in Canada, and doesn’t have much of an emerging markets edge,” says Mr. McDevitt.

“The funds have very little in common,” he says, adding “they (Robertson Stephens) are trying to get rid of a crummy record.”

Yet Partners isn’t having a great run either. The fund, which was in the top 2% of small-cap value funds in 1996, lagged its peers last year. This year, its A shares have fallen 14.45% through Aug. 21, compared with a 2.86% loss for its peers.