Few investors took note when

AMF Bowling

(PIN) - Get Report

was booted from the

Russell 2000

small-cap stock index at the end of June. But for holders of the $4.8 billion

(BARAX) - Get Report

Baron Asset fund, it was an ignominious occasion.

Baron Asset held 9.5 million shares of the bowling equipment supplier as of March 31, the last time it made a detailed holdings disclosure. Most of those shares were purchased in 1997 and 1998 following AMF's initial public offering at $19.50 in November 1997. They are now worth less than a buck a share. Though the stock currently accounts for less than 1% of Baron Asset's portfolio, it is one indication of why the fund has been rolling gutter balls lately. Its 3.4% one-year return ranks behind 99% of the mid-cap growth funds tracked by

Morningstar

.

Portfolio manager Ron Baron is known for taking large, illiquid stakes in companies he favors. He boasts that he knows management well and has a deep understanding of the companies in which he invests, which is why he holds onto them for the long haul. The fund's annual turnover rate is just 15.6% vs. 100%-plus for the average mid-cap growth fund.

But these positions also can blow up in his face, as demonstrated by AMF. And the pattern appears to be repeating itself with the fund's current No. 2 holding,

Sotheby's

(BID) - Get Report

, which has plunged 39.6% in value this year amid accusations the auction house engaged in price fixing with rival

Christie's

.

Baron "really prides himself on knowing the companies he invests in inside and out," says Christopher Traulsen, a Morningstar analyst who covers the fund. "He tends to fall too in love with the stocks and perhaps management's line too much."

It may have been impossible for Baron to know about the price-fixing allegations before they broke. But for investors wondering how the Sotheby's problem will pan out, the fate of the fund's AMF investment offers little comfort. So far, it doesn't appear Baron has much of an exit strategy for either stock.

"They already took such a big bath on AMF, and at these prices, it might be sort of silly to sell," says Traulsen.

Baron isn't talking about his one-time favorite pick, and won't say whether the fund's stake in AMF has been pared since March 31. He has been quoted as saying that buying shares of AMF was a huge mistake. Of course, two years ago, he had predicted the stock would rise to 100. At the time, bowling was enjoying a worldwide rebound, with scores of bowling centers opening up, especially in Asia. But the Asian economic crisis of 1997 and 1998 made the sport -- and AMF as its biggest promoter -- about a fashionable as a pair of worn bowling shoes.

Spare Me!
AMF positioned itself for a bowling boom that hasn't materialized.

At one time,

Baron Asset Management

, or Bamco, the fund's parent company, owned 13 million shares of AMF. Bamco remains the stock's largest shareholder with 11 million shares, including Baron Asset's stake, according to recent filings.

Since 1998 the stock has been on a steady slide. It's reported several quarters of losses, and revenue from its bowling centers increased less than 1% in the first quarter from the same period a year before. From May 1996 through last December, AMF was on a furious acquisition spree, acquiring 230 bowling centers in the U.S. But its ailing revenue has curtailed its acquisition spree, according to the company's latest annual report.

In March 1999,

TheStreet.com

reported that Baron sold 650,000 of those ailing shares from private client accounts to the Baron Asset fund. The fund bought the shares for 7 3/8 on Oct. 7, 1998, and within days the stock fell further. At the time, Morty Schaja, the company's chief operating officer, said Baron Asset bought the shares in part to capture some of their tax losses for the fund and didn't expect the adverse effect the play would have on existing shareholders.

Following

TSC's

inquiries, the firm said it covered fund shareholders' losses on the transaction, which at the time totaled $1.6 million. The fund's regulatory filings don't indicate the amount ultimately reimbursed. A Bamco spokesman would say only that, "We have met our obligations to our shareholders on this issue." Additional details would be disclosed in the fund's audited report for the year ending Sept. 30, 2000, he said. That report will probably be out by year-end.

Regardless, the outlook for AMF appears bleak. The company has been operating in the red since 1997. It has outstanding debt -- both in the form of high-yield bonds and a bank loan -- of around $1.2 billion. That's a crippling burden for a stock with a market cap of just $57.5 million. Its bonds have been downgraded several times by

Standard & Poor's

. The stock has fallen 78% this year. It closed at an all-time low of 3/16 the day it was dropped from the Russell 2000 index. It has since recovered somewhat, and closed at 11/16 on Friday.

Given the tiny position that AMF makes up in the fund, shareholders are probably more concerned about a more recent blowup, Sotheby's. As the stock's largest shareholder (Bamco owns more than 55% of Sotheby's common shares), Baron has been an activist in trying to elect an independent board of directors that doesn't have any connection with former Chairman Alfred Taubman.

Meanwhile, some Baron Asset shareholders have hit the exits. Mari Adam, a financial planner from Boca Raton, Fla., said she was in the fund for several years until this month. "My patience finally gave out," she says. Over the past 12 months, the fund underperformed the hot mid-cap growth category by more than 51 percentage points. It's lagging again this year, up just 0.7%, while the average fund in the category has gained 7.6%.

But even Baron's supporters are wondering about his wisdom in holding on to some of the losers. "Frankly, for a mid-cap growth fund, it's a stretch of the imagination to talk about AMF Bowling as a growth company," says Chitra Staley, chief investment officer with financial planning firm

Mintz Levin

of Boston.

Even with these blowups, observers like Traulsen of Morningstar aren't ready to write off Baron just yet. For several years in the early to mid-1990s, the fund was besting its mid-cap growth peers. Baron has proven himself an expert stock picker in the past and might shine again.

Charles Schwab

(SCH)

, the fund's largest holding (18.1% of the portfolio as of June 30), was probably Baron's most prescient move. He picked up the discount broker in the early 90s when it was a mid-cap stock. It now has a market cap of $43 billion.