Ron Baron's mutual fund advisory firm says it voluntarily reimbursed the

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Baron Asset fund $1.6 million Friday following a query by

into a stock trade that benefited some of Baron's private clients but has so far hurt the public fund's performance.

The October 1998 sale of a large block of

AMF Bowling

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stock from Baron's private client accounts to the Baron Asset fund while AMF's price was steadily declining enabled Baron's private clients to sell at a price the stock has not seen since. Meanwhile, the declining shares have saddled the mutual fund with a loss.

Baron's fund management firm,


, said Monday it is no longer sure the 650,000-share trade was in the best interest of the fund's shareholders.

"We asked ourselves, 'Did we do the right thing for all of our clients, both our mutual fund and our private clients?'" Morty Schaja, chief operating officer of Baron's holding company, said Monday. "And when we couldn't answer that question with a definitive yes, that's when we went back to the board and said we would absorb that loss."

The transaction raises the issue of conflicts between a mutual fund adviser and the fund's shareholders. Privately managed accounts can carry performance-based fees, while mutual funds generally charge fixed fees regardless of performance. In such cases, there is a danger that the adviser may dump poorly performing stocks from private client accounts into a mutual fund.

But Schaja defended the transaction.

The October sales of AMF shares out of Baron's other funds and accounts "was largely to recognize tax losses," says Schaja, "and was related in a few small cases to leverage and margin calls in a few private accounts."

"Our feeling was that Baron Asset fund had an opportunity to buy a big block of stock at what we thought was an incredibly attractive price," says Schaja.

He declined to say whether the private client accounts involved in the Oct. 7 trade carried management fees pegged to performance.

The trade took place amid a fourth-quarter selloff of AMF by Baron's two investment adviser firms: Bamco, which manages mutual funds, and

Baron Capital Management

, which manages separate accounts for private clients. After selling AMF shares eight out of the nine trading days beginning Sept. 24, 1998, Bamco bought 650,000 AMF shares on Oct. 7 for the Baron Asset fund from Baron Capital Management's private client accounts at 7 3/8.

Two days later, Bamco resumed selling AMF from mutual funds other than Baron Asset at prices ranging from 6 3/4 to 4 15/32 through the end of December.

By year-end, Baron's $470 million

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Small Cap fund had eliminated its AMF stake. His $344 million


Growth & Income fund had halved its AMF exposure. And the number of shares held by the asset manager's private clients had been significantly reduced.

In contrast, the $6 billion Baron Asset fund showed an increase of 650,000 AMF shares during the fourth quarter -- bringing its total AMF stake to 10.5 million shares. (Further selling this year had reduced that stake to 10.2 million shares by March 17.)

On Friday, AMF shares closed at 4 7/8, representing a $1.6 million paper loss to the fund on the 650,000 shares since the Oct. 7 purchase.

After receiving the call from


last week, Schaja said he and Baron reviewed the matter and called a special meeting of the fund's general counsel and board of directors to determine whether Bamco could reimburse the Asset fund for $1.6 million. The board approved the reimbursement Friday.

"You made aware to us the fact that we actually bought 650,000 shares of AMF at about 7 3/8 at a period of time when were selling stock for other accounts, and now we look back with the stock trading at 5 or under 5, and it doesn't feel so good," said Schaja, who, like Baron, is a member of the fund's board. "We told the board we didn't feel good about that particular trade and that we wanted to make the fund whole with respect to all losses involved in the trade."

In addition, Schaja said the fund firm intends to cover any loss the Asset fund suffers from a further price decline in the 650,000 AMF shares.

Ron Baron has frequently referred to his asset management firm's substantial bet on AMF as a mistake. His firm began acquiring AMF in late 1997, building a position that reached 13.5 million shares, representing a 22.6% stake, by August 1998.

That summer, the bowling company's stock came under pressure from fears that weakness in the Asian markets, where AMF had been aggressively expanding, would hurt the firm's bottom line. After peaking at 31 in April, AMF shares steadily declined.

In a December report to shareholders, Baron said the fund's stake in the ailing bowling company had "penalized" performance an estimated 4% for the year. Still, Baron Asset fund's 1998 return of 4.3% was respectable among its peers. The fund ranked 185 among 638 small-cap funds tracked by