BUSINESSWEEK ONLINE : APRIL 10, 2000 ISSUE
FINANCE Pilgrim's (Bumpy) Progress Managers at Pilgrim Baxter & Associates Ltd. know a thing or two about volatility. As of the end of 1999, Pilgrim Baxter was the largest institutional investor in software company MicroStrategy Inc., according to Securities & Exchange Commission filings, with nearly 3.6 million shares. On Mar. 20, MicroStrategy announced that it would restate revenue and earnings for the past two years--and the stock plunged over 60% in one day. So did that announcement have Pilgrim Baxter Chief Investment Officer Gary L. Pilgrim pulling his hair out? Not quite. ''This is standard fare for the world we live in,'' Pilgrim says. But he declines to say whether he has sold, bought more, or is simply sitting tight with his existing stake. That sort of iron stomach has paid off richly for Pilgrim Baxter lately. The firm, which specializes in small- and mid-cap stocks, has been on a roll since small-cap stocks--high-technology plays in particular--rocketed in 1999. Even after MicroStrategy's swan dive, the firm was still up 381% on its investment. So despite the occasional blowup, the returns of PBHG, Pilgrim Baxter's funds group, have been downright spectacular (table). One fund, New Opportunities--piloted by 27-year-old Frank ''Quint'' Slattery--is beyond spectacular, up over 750% in its 13-month history (BW--Mar. 6). The fund was closed to new investors in November, but Slattery's Select Equity remains open. Those fat returns have triggered a flood of new money, with total assets at the firm ballooning to $28 billion. That's quite a comeback from just a year-and-a-half ago. From the end of 1996 to the fall of 1998, Pilgrim Baxter saw assets under management shrivel from $20 billion to $11 billion. The primary culprit: the continued dominance of large-cap growth stocks and the relative underperformance of their smaller brethren. But despite the drubbing in the market, Pilgrim Baxter stuck to its small- and mid-cap focus. ''It's a bumpy road,'' Pilgrim says of investing in small, fast-growing companies. ''The bumps aren't because we are geniuses one day and dopes the next. It's the asset class.'' FOR SALE? In fact, the past few years have been more than bumpy for Pilgrim Baxter. In late 1997, the company hired former Fidelity executive Paul J. Hondros to lead an aggressive expansion of the firm's retail-sales effort. That was followed in 1998 by negotiations by Pilgrim Baxter's parent, United Asset Management Corp., to sell the fund operation to Nationwide Financial Services Inc. But as Pilgrim Baxter's performance continued to suffer and investors pulled money out of the firm, the deal collapsed in the fall of 1998. That led to Hondros' exit and a brake on growth plans. Even more turmoil came in 1999 as several top PBHG managers left. Pilgrim Baxter's recent hot streak makes all that nastiness seem like a distant memory. Flagship PBHG Growth Fund, managed by Gary Pilgrim, was up 92.4% last year, besting the Standard & Poor's 500-stock index by 71.4 points. Compare that with 1998, when the fund was up just 0.6%, trailing the S&P by 28 points. ''The temptation to change your stripes when the market is not going your way is very, very strong,'' says Edward S. Rosenbaum, director of research at fund tracker Lipper Inc. ''They are reaping the benefits of consistency and survivorship.'' That sort of performance, of course, makes Pilgrim Baxter a more valuable asset should UAM decide to put the company on the block again. Alexander Paris Jr., director of research at Barrington Research Associates Inc. in Chicago, figures Pilgrim Baxter could fetch more than $1 billion if it were sold--money that could be used to lower UAM's debt. ''I could see [a sale] happening for the right price,'' says Paris. A spokesman for UAM declined to comment. Sale or no sale, however, Pilgrim Baxter and its investors will continue to ride the small-cap roller-coaster. By Amy Barrett in Philadelphia _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Return of the Stock-Pickers TABLE: The Best Funds TABLE: The Worst Funds TABLE: Big Returns at Big Funds TABLE: Bond-Fund Leaders TABLE: How the Fund Groups Fared Pilgrim's (Bumpy) Progress TABLE: Plump Returns from PBHG's Largest Funds INTERACT E-Mail to Business Week Online

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