In the mutual fund business, there's the right way, the wrong way and the Alger way.

You might know of

Fred Alger Management

, a boutique investment company based in New York, because it ran the best-performing mutual fund in 1995. But you probably didn't know that

Dan Rice

, whose

State Street Research Global Resources

(MSEGX) - Get Report

was the No. 1 fund in '96, cut his teeth at Alger.

That's no coincidence. Fred Alger alums manage tens of billions of dollars for mutual funds and institutional investors, and they're among the industry's most successful managers.

The elite network includes

Jennifer Stonestreet Uhrig

, a rising star at Boston-based

Fidelity

, four managers at Denver's

Janus Capital

, one of the hottest fund companies of 1996, and

Rob Lyon

, who runs some $7 billion at Chicago's

Institutional Capital Management

.

Together, the Alger alums control far more money than the firm where they once worked. Alger, which was founded in 1964 by Fred Alger and is now run by his brother David, manages about $1.2 billion in nine mutual funds and $6 billion more for private accounts.

Behind the success of Alger's proteges: the firm's dedication to finding top talent, then creating an intellectually challenging but brutally competitive environment.

At the depths of the stock market's doldrums in the late 1970s and early '80s, Alger was among the few money management companies hiring, and the company built a talented pool of about a dozen senior analysts. The company then split the analysts into two teams. But unlike other money management companies, analysts didn't report to a portfolio manager, Rice says. Rather, the analysts made the buy/sell decisions.

"There were 11 analysts-slash-portfolio managers -- we all functioned as equal entities," Rice says. "Portfolio decisions were made basically by the group."

And the group was sometimes brutal, says

B. Anthony Weber

, who worked at Alger between 1983 and 1988 and now manages private portfolios and the $100 million

Shelby

fund

(SHELX)

in his native Kentucky.

On Tuesday nights, the firm had "ball-breaking sessions," Weber says. "For three hours, we would take the five worst stocks

of the week, and the analyst had to defend those names." Weber adds the grilling was "unrelenting at times."

"Those sessions sometimes lasted until 11 at night," Rice says. "It was in your face. ... We didn't take any prisoners."

Rice adds, "Fred's feeling was if you create an environment of controversy and confrontation, you'll stimulate ideas. I think that's a pretty good attitude."

Some analysts had a hard time facing the criticism. "It was a bit of a pressure cooker," Weber says. "It could be a tough environment at times, but that's why people on the Street make as much money as they do."

To provide a constant flow of fresh talent, the firm began to expand, hiring "at first one and then two research analysts for each senior analyst," Lyon says.

Unlike many other money management companies, Alger didn't seek out MBAs or economics majors, Lyon says. "They looked for people with very good grades and other extracurricular activities and didn't worry about what they'd majored in." With Fred having gone to

Yale

and David having attended

Harvard

, those two institutions became prime recruiting grounds.

"We hire very bright people and we put them through this three-year training program," says David Alger, who was second-in-command at Alger to brother Fred for 25 years before taking over in 1995. "We just think we have an extremely good process for training people."

Under Alger's system, new hires start as research associates and learn the nitty-gritty of reading balance sheets. Along the way, they're expected to pass the first part of the exam to become chartered financial analysts, or CFAs. They then become associate analysts, who evaluate companies under the supervision of senior analysts. Finally, after the CFA program is complete, they become full-grown analysts, with the primary responsibility for following companies.

Many mutual funds and investment banks have similar training programs. But Alger says his firm's is much more comprehensive, because unlike other firms, Alger doesn't end its training and send its analysts to business school after two years. In fact, the firm won't rehire anyone who leaves it to get an MBA, because it believes its training is superior.

"We tell people, 'You leave to go to business school, you're gone,'" Alger says.

And the new hires were and still are expected to work hard. Rice recalls their regularly being kept at the office until midnight or later.

The intensity left some analysts tightly bonded. Weber, who left about a decade ago, says he visited David Alger the last time he came to New York and remains friendly with several of his colleagues.

On the other hand, Rice hasn't stayed as close. "It was a very tough environment," he says. "Fred was an awesome stock-picker, but a very tough man to work for."

So does Alger's method work?

Apparently. In 1995, the $150 million

Alger Capital Appreciation

fund

(ACAPX) - Get Report

led all U.S. mutual funds, with a 79.3% gain. Then, in 1996, Rice led his small-cap energy fund to the year's best performance with a 70.3% gain.

At Janus, Alger alums include

Helen Young Hayes

, who has led the $5 billion

Worldwide

fund

(JAWWX) - Get Report

to a 131% gain over five years, second among global funds, and

Tom Marsico

, who captained the $4 billion

Twenty

fund

(JAVLX)

to a 94.8% five-year return, 22nd among 75 capital appreciation funds, according to fund tracker

Lipper Analytical Services

.

And in January, Fidelity promoted Uhrig to head two funds with about $10 billion in assets after a successful 27-month stint running Fido's $1.7 billion

Mid-Cap

fund

(FMCSX) - Get Report

. Uhrig came to Alger from Harvard in 1983 and left for an MBA in 1985.

Alger alums don't always have the golden touch. Many of the firm's former analysts make heavy bets on small-caps, a strategy that fits their confident, research-intensive style. Lately, that strategy has left some Alger-trained managers badly trailing the broader averages.

For example, Weber guided the Shelby fund to a gain of 70% between its inception in June 1994 and the peak of the small-cap boom in May 1996. Since then, the fund is down 15.6%.

"This is the toughest period for small-caps since 1983," Weber says.

Still, the Alger alums have a collective record that appears to be more than just luck. In fact, David Alger says his biggest regret about the training is that it's almost too effective. He admits that it bothers him when his analysts leave the firm to run money elsewhere.

"But I'm not sure if there's anything I can do about it," he jokes. "Indentured servitude was outlawed in the mid-19th century."

But with competition for good stock-pickers so much fiercer than it was a decade ago, Rice says he's not sure that Alger -- or any company -- could build the same talent pool Alger created in the early '80s. Indeed, even Fidelity, the biggest and richest mutual fund company, has lost dozens of managers in the last year.

Still, Rice, Weber and Lyon agree that they'd give Alger-trained analysts the benefit of the doubt. The firm's record speaks for itself.

By Alex Berenson

aberenson@thestreet.com