RANDY HECHT: RS INVESTMENT FINDS FREEDOM

You could almost hear a collective exhalation as four senior managers completed their purchase of Robertson Stephens Investment Management from BankAmerica Corp. early last month.

The $20 million buyout ended a year and a half of upheaval that began when BankAmerica acquired the firm along with its investment bank parent, Robertson Stephens & Co. Within months, both found themselves on the block because of B of A’s impending merger with NationsBank. BankBoston Corp. bought the investment bank, but the asset management unit couldn’t find a suitable home.

“It was really distracting,” says Ron Elijah, a star portfolio manager at Robertson who is leaving the newly rechristened RS Investment Management following an accelerated payout of his management contract by BankAmerica. “The sell process got to be a little old.”

That’s all behind RS now, though. The new owners, led by president and CEO G. Randy Hecht, are determined to turn around the dismal performance that induced the firm’s rock-bottom price in the first place. (Considering the $10 million they got from BankBoston to drop the Robertson Stephens name, it cost them a mere $10 million.)

Priority number one, says Mr. Hecht, 47, has been reorganizing the firm, which manages $3.7 billion and houses 10 mutual funds.

Indeed, RS has moved away from a model in which Mr. Hecht served as point man for all decisions to one in which he loosely oversees three new stand-alone divisions: a growth business, which senior manager Jim Callinan runs as president; a value contrarian business, run jointly by senior managers Paul Stephens and Andrew Pilara; and a private investment business, run by Jim Foster, a senior manager who did not participate in the buyout.

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The redesign should bode well for the company, say insiders. According to one former Robertson Stephens investment banker, Mr. Hecht’s near exclusive reign over the money management business had created a bottleneck.

The investment banker says reorganizing by investment style should also end what he calls acrimony between the value and growth camps over their uneven performance results.

In 1997 and 1998, for example, the firm’s flagship value fund, Robertson Stephens Contrarian, performed abysmally, returning

-29.5% and -32.5%, respectively, when the average value fund tracked by Morningstar Inc. was returning 26.9% and 5.4%. Its small-cap value Partners Fund returned 18.1% in 1997 but lost 27.3% last year.

Conversely, Robertson Stephens Value + Growth, a large-cap growth fund, returned 13.8% and 27.4%, compared with peer averages of 26.1% and 35.9%. And small-cap growth funds Diversified Growth and Emerging Growth returned 29.6% and 16.4%, and 18.5% and 28.0%, respectively, compared with peer averages of 16.4% and 5.0%.

Mr. Hecht denies that there was ever infighting at the firm, and says any bureaucratic headaches were the direct result of its ties to B of A.

He adds: “We were trying to be a big, big firm under BankAmerica,” whose objective for the firm – to manage an astonishing $200 billion – preoccupied the fund managers.

“Everyone was thinking about what kind of products we were going to create, and on what platforms,” Mr. Hecht says. “Those were hours being spent thinking about structure rather than about what stocks we wanted to buy and how we could make our products better.”

That the company has now refocused its attention on stock-picking is already showing in its numbers. Five of its 10 mutual funds are outperforming their benchmarks year to date, compared with just three last year.

And Mr. Callinan, who manages Robertson Stephens Emerging Growth in addition to overseeing the growth unit, is the second-ranked emerging growth manager in the country right now based on a first-quarter return of 27.9%, according to Morningstar Inc.

More important, RS has slowed the hemorrhaging precipitated by its topsy-turvy performance. Though money is still flowing out of the funds – $67.9 million to date in 1999 – it seems highly unlikely that outflows will match those of last year, when the funds bled $748.8 million. Performance results usually affect net flows in a gradual manner.

Perhaps most important: RS has come through the last 18 months with its portfolio management team intact – sort of. Mr. Elijah leaves on May 1 to start his own asset management firm, but he’ll continue to subadvise the two RS funds he’s always managed: the $680 million Value + Growth and the $150 million Information Age.

And Rick Barry, who has already left to form his own company, Eastbourne Management, continues to manage the $130 Contrarian fund as its subadviser.

The departures weren’t entirely unanticipated. “Any time you have changes in the management structure of a firm, some of the managers decide that the new structure isn’t to their liking and go and do something different,” observes Morningstar president Don Phillips.

What may have a greater long-term effect is the split between the firm and its investment banking ex-parent.

“I think they were in better shape way back when,” says R. Stephen Doyle, chief executive of Montgomery Asset Management, a San Francisco-based competitor that was sold to Germany’s Commerzbank AG in 1997.

He suggests that the resources of a investment banking parent can’t be underestimated: “I had a meeting yesterday with a Fortune 50 company that was introduced to me by Commerzbank; I never could have gotten them in the door otherwise.”

In fact, Mr. Doyle submits that without deep pockets on which to rely, RS will likely need to align itself with another firm at some point. “I’m not sure the transactions in that world are over with,” he says.

“There are pros and cons” to being independent, concedes Mr. Hecht. “On the one hand, being able to solely advance our own agenda is absolutely optimal. On the other hand, the Robertson Stephens organization was a very entrepreneurial one that focused on exactly the same kinds of companies that Jim (Callinan) invests in, so there was great networking that derived from knowing intimately the investment bank partners.”

RS “lost a little something” in the split-up, adds Mr. Callinan. But there’s little time or reason to look backward, he suggests.

“Our sole plan now is picking stocks that go up. We want to forget all about whatever happened with BankAmerica. Instead we want to get going and we want to start running really fast.”