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Syre & Bailey: Keystone's Win is Pioneer's Loss

Former

Pioneer Capital Growth

manager Warren Isabelle has landed at

Keystone Investments

as their new chief investment officer.

Isabelle stunned insiders at Pioneer Group last Thursday when he up and quit on the spot, just before the Boston fund company was preparing to host a gathering of its wholesalers.

Isabelle said in an interview he had talked on and off with Keystone owner

First Union Corp.

for several years before deciding to leave Pioneer and his $2.2 billion fund behind.

The reason behind his departure: disagreement over how to handle the flow of cash streaming into Capital Growth (PCGRX). Isabelle said he asked Pioneer more than a year ago to close the fund because it was hard to put so much money to work in smaller stocks. Pioneer executives declined, he said, but shortly after they offered him a chance to start an entirely new small company fund. That fund, which quickly piled up $500 million in assets, has since been closed off to new investors.

Previous talks between Isabelle and Charlotte-based First Union had stalled in the past, in part because he did not want to move. "They didn't know what to do with me, quite honestly,'' he said. Then First Union's acquisition of Boston-based Keystone last year created a new opportunity.

Isabelle's move is a coup for for Keystone, a fund family whose performance has been lackluster at best over the last several years. (Keystone's sale to First Union was discussed in a November 11

column in

The Street

.)

Isabelle has had other suitors closer to home in the past and he chose to stay at Pioneer. Probably the best lead came two years ago from

TheStreet Recommends

Putnam Investments

, two blocks away from Pioneer's headquarters.

Putnam needed to find a successor for its best-known fund manager, Matt Weatherbie, who left to start his own small shop in Boston,

M.A. Weatherbie & Co.

It had talked to several people, including

Fidelity's

Beth Terrana, and eventually hired Keystone's Roland Gillis. But Isabelle was a viable choice and Pioneer went to lengths to keep him from walking out the door.

Around that time, Isabelle began taking on broader investment management duties and later became director of research. That was one job Isabelle handed back to Pioneer's top investment executive, David Tripple, last fall.

Isabelle also had given up management of the new small company fund, launched in November 1995, several weeks ago.

There was a good reason why Pioneer wanted to keep Isabelle in the fold and leave Capital Growth open to new customers. He was the company's only five-star stock picker and managed one of Pioneer's few products that could stand out in a market obsessed with growth funds. (the larger Pioneer and Pioneer II funds, both value funds, still have more assets and make much more money for the company.)

Pioneer makes a point of being a value-oriented investment shop and even came up with the somewhat tortured phrase "aggressive value'' to describe Isabelle's style. But Capital Growth is always stacked up against other growth funds.

Isabelle bought transition companies, pummeled cylicals and startups. If he was working at his desk instead of cleaning it out last Friday, Isabelle would have been one of the few "growth" mutual fund managers in America uninjured by the

Cascade Communications

bloodbath.

He was big on retailers, keeping

K mart, Woolworth, Toys R Us and Fingerhut

among his top 10 holdings. He also took sizable positions in insurance businesses like

20th Century Industries

and

Western National

.

But he also got hammered last summer with all the momentum growth funds, despite the different portfolio, and suffered through Capital Growth's first disappointing year since its inception in 1990. The fund, which still ranks 17th in a 254-fund field over five years, is lugging around bottom-decile one-year performance numbers, according to

Lipper Analytical Services

.

Isabelle's assistant, Rod Wright, took over Capital Growth this week. Wright has been working on the fund for a year and came to Pioneer three years ago from

Prudential

.

Wright said Capital Growth shareholders aren't going to see any style changes. Ask Wright for a few of his stock calls that ended up in the Capital Growth portfolio and he points to specialty retailer

Cole National Corp.

and a beaten-up computer

Amdahl Corp.

"I'm not a Warren clone but we do think similarly,'' said Wright.

Steven Syre and Steve Bailey write a financial column for

The Boston Globe.

This column is exclusive to

The Street.

Please send feedback to

syre&bailey@thestreet.com

.