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managers plan for best of both worlds

Two portfolio managers from Robertson Stephens Investment Management are leaving to form their own firms while remaining as sub-advisers for their old funds. The arrangement is likely to both increase the independence and compensation of the managers and to serve as a model for other high-profile managers.

Ronald Elijah will continue to manage the Robertson Stephens Value + Growth and Information Age funds through his newly-formed firm, Elijah Asset Management. In addition, Rick Barry will continue to manage roughly one-third of the assets of the Contrarian Fund through Eastbourne Management, Barry's new firm, said Stephanie Linkous, a spokesperson for Robertson Stephens.

Not only do the two managers stand to gain the equity in their own companies but they are also likely to be paid on a different and potentially more lucrative basis for managing the Robertson Stephens funds than they were as employees.

Portfolio managers who sub-advise are normally compensated based on the amount of assets they manage rather than on performance, salary history and firm-wide profitability, the traditional factors for the employees of advisory firms, said George Wilbanks, an executive recruiter with Russell Reynolds Associates in New York. The manager of a successful fund could potentially earn more under the sub-adviser scheme.

Elijah and Barry could undergo such a switch in the basis of their compensation if their plans - disclosed in an SEC filing - are approved by shareholders. But, Linkous declined to comment on the two managers' compensation arrangements.

Mutual fund industry executives and consultants said the Robertson Stephens sub-advisory arrangement is rare. They said, however, that it may become more common for portfolio managers essentially to become independent contractors. This will probably be especially true for those working for smaller asset management firms that aggressively market portfolio managers.

Managers with strong investment performance and a public following may be able to strike out on their own but retain ties to their old firm in some circumstances, said Geoffrey Bobroff, a fund consultant in East Greenwich, R.I. Keeping such managers in traditional employer-employee relationships may be increasingly difficult, he said.

The Robertson Stephens managers "walk out the door but they walk out with revenue in their pocket," Bobroff said. "I think the traditional money management firm shudders at the thought of having its talent go off and set up these entities."

Robertson Stephens, which is based in San Francisco and had approximately $4.7 billion in assets under management as of Dec. 31, markets itself as an entrepreneurial firm which eschews big-company culture. In November, Robertson Stephens senior managers announced plans to buy the firm from BankAmerica Corp. The move will free the firm's personnel "from the distractions that come with being a part of a very large organization," G. Randy Hecht, president and chief executive officer, said in a letter to shareholders dated Nov. 20. (MFMN 11/30)

Elijah and Barry formed their own firms as part of the management buyout which is expected to close during the first quarter. Robertson Stephens management has not disclosed how much it is paying BankAmerica.

Sub-advisory relationships are common in the mutual fund industry. More than 1,100 out of 4,700 equity funds have sub-advisers, according to Morningstar. And there have been some arrangements similar to the Robertson Stephens proposal such as that of Michael DiCarlo, the former John Hancock Funds portfolio manager, said Bobroff. DiCarlo left Hancock and formed his own firm in 1996 but continued to manage Hancock's Special Equities Fund. He was dropped last year because of poor performance.

Nevertheless, such relationships are the exception rather than the rule, said Wilbanks. He described sub-advisory relationships such as the Robertson Stephens arrangement as "the next step" in the evolution of portfolio manager compensation.

Although they are not leaving the firm, other Robertson Stephens portfolio managers stand to get an ownership stake, according to the preliminary proxy statement which Robertson Stephens filed with the SEC on Jan. 14. Paul H. Stephens, Andrew Pilara, Jr. and James Callinan, will own 22 percent, 15 percent and 20 percent, respectively, of the firm, according to the proxy statement. Hecht will own 29 percent.

The funds' shareholders must approve the proposals. A vote is scheduled for Feb. 26.