June 1997
Business
Mutual Admiration
Investors love Houston’s AIM Management Group, whose mutual funds have made them rich. AIM’s founders love them back: They’ve gotten rich too.
THERE’S A PHOTOGRAPH TED BAUER likes to show people who ask about the humble beginnings of his investment company, AIM Management Group. It’s a blurry snapshot of him and co-founder Gary Crum sitting in an empty office in the Marathon Building in downtown Houston in 1976. “The telephone didn’t work,” 78-year-old Bauer recalls. “Those are Gary’s chairs, and that’s my card table. That was about it. And not one dollar under management.”
These days Bauer and 49-year-old Crum can afford better furniture—a whole skyscraper, even. After two decades of explosive growth, AIM is the twelfth-largest mutual fund company in the United States, with almost $70 billion in assets and 1,400 people in Houston and Austin on its payroll. The company manages $66 billion for some 3.5 million shareholders, with 39 kinds of stock, bond, and money market funds to choose from; last year investors poured nearly $14 billion into its mutual funds. AIM’s top performer is its $2.1 billion Aggressive Growth Fund, which invests in fast-growing stocks like the Landry’s restaurant chain, computer retailer CompUSA, and PetCo pet supply stores; it has one of the best five-year annual returns—20.7 percent—of any diversified fund in the business. It has been so successful, in fact, that AIM closed it to new investors in 1994, fearing that too much money was chasing too few quality investments. When it was briefly reopened in 1995, $1 billion came flooding in; after only two days, the company had to close it again.
How did chairman of the board Bauer, director of investments Crum, and a third partner, fifty-year-old president and CEO Bob Graham, turn their tiny start-up into an investment powerhouse? Like all entrepreneurs, they saw an opportunity—in mutual funds—and exploited it; today, thanks to companies like theirs, such funds are as common as stocks and bonds and are a favorite vehicle for retirement savings. And over time, they developed a strategy: Unlike their counterparts at other fund firms, who bought stocks when they were cheap or overlooked by Wall Street or when they emerged as takeover targets, AIM’s principals were early devotees of the “earnings momentum” theory of investing: You buy stock when a company’s earnings are growing faster than the rest of the economy—regardless of the price—and sell at the slightest hint of bad news. AIM’s portfolio managers don’t bother to grill corporate executives or do rigorous critiques of financial statements to pick the fastest-growing stocks. Rather, they scan the wire services, talk on the phone with Wall Street analysts, and review earnings projections in an almost robotic fashion. “I don’t like them to travel,” says chief equity officer Scott Lucas, who manages AIM’s stock pickers. “If they’re on the road, they’re not sitting in front of their computer screens.”
If it sounds like a simple approach to a complex business, it is—too simple, some say. Following the earnings momentum theory means AIM’s fortunes are tied to the health of the stock market at any given time. When the market is good, AIM’s funds are very good; when the market is off, they’re horrid. In its annual mutual fund review, for instance, Forbes gave AIM’s Constellation Fund—which invests in growth companies like software giant Microsoft and hospital chain Columbia/HCA Healthcare—an A+ in up markets but an F in down markets. And, in fact, after the Dow Jones Industrial Average slid 157 points on March 31, growth funds like AIM’s lost $1 billion in a week’s time. “The problem with earnings momentum is when it doesn’t work, it can really, really fail,” says Don Phillips, the president of Morningstar, a Chicago-based mutual fund tracking firm. By and large, though, the market has been robust over the past two years, so earnings momentum has worked; when the Dow rebounded in late April, gaining 179 points in a single day, AIM’s funds recovered nicely (though how nicely won’t be known until quarterly figures are tallied at the end of this month). “Our objective is not to outperform the market in every part of the cycle,” Graham says. “We tend to outperform the market over the complete cycle.”
That consistent record has led other mutual fund companies such as PBHG, Stein Roe, and Van Wagoner to jump on the earnings momentum bandwagon. And it has brought a handsome reward for Bauer, Crum, and Graham: In November they pocketed $880 million when they sold AIM to the London investment firm Invesco for $2.2 billion—the largest takeover of a fund company in history. All three have kept their jobs with AIM, which is now a division of one of the world’s largest independent money managers, a firm with $160 billion in assets.
Twenty years ago AIM’s founders must have seemed crazy to leave their secure jobs managing money at the Houston insurance company American General Capital Management Corporation. But they were determined to go out on their own, so they scraped together $480,000 of their own money, solicited another $20,000 from private investors, and lined up $2.25 million in letters of credit, then created three funds from scratch: a high-yield bond fund that invested in risky corporate debt, a balanced fund that invested in both stocks and bonds, and a money market fund that invested in low-risk, low-return securities like Treasury bills and bank certificates of deposit. Yet despite their reputations as smart money men, they couldn’t get investors to bite. It was so slow at first that they found themselves sitting around “looking at each other,” Bauer recalls.
