Jim Salners is volunteering for the firing line.


Jim Salners
Director of Marketing and Sales Strategy
AIM Funds

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Salners is director of marketing and sales strategy at growth-oriented

AIM Funds

. As stock mutual funds across the board get whacked in the market's downdraft -- leading investors to start pulling money out of those stock funds -- Salners has embarked on a nationwide trek. His mission: to meet with AIM's 5,000 financial planners to answer their and their investors' questions and quell their fears about the economy. Beginning next month, he will be joined by a number of key AIM investment officers.

Given that 46 out of AIM's 57 funds have lost money so far this year, and given that AIM funds had net outflows of $288 million in February, Salners' tour comes at a pressing time for the growth fund shop. For today's Daily Interview, Salners relays his message: The time to sell was 12 months ago. Don't start getting into CDs. And this bear market, too, shall pass, and hopefully soon.

TSC: A number of your funds are posting significant negative returns so far this year. The (ABCAX) - Get Report AIM Blue Chip fund, for instance, is down 20.37% so far this year after declining 9.3% in 2000. How difficult is it to ask financial planners and investors to keep the faith?

Salners:

In a nutshell, what we are doing is talking about what we have learned over the past four years and how our clients need their help now more than ever before to make their portfolios grow. They are looking for information on how we go forward from here.

We're telling them that this bear market, too, shall pass, that bear markets are a normal cleansing of the marketplace. We're also trying to strengthen their long-term perspective and also trying to give them insight into what's gone on over the last three or four years so that they can realize that this is part of the economic and business cycle.

We've had an abnormal market, starting back when you couldn't beat an index fund to save your assets. If you weren't in the seven largest stocks in America, you really couldn't compete in terms of performance. But those seven stocks constituted almost 40% of the

S&P 500

. To have a concentration in a mutual fund to that degree almost defeated the purpose of a mutual fund.

Then, if you were not in technology, specifically in the

Nasdaq

of 1999, you just missed the boat, and that was led by the dot-com phenomenon, which truly was strange. We are going to look back at this when we're all sitting in our retirement rocking chairs and think, "How in the world did I get sucked into all of this?" These were companies that came to the marketplace with a concept or an idea and exploded in valuation without any earnings whatsoever. It's going to be hard to explain to our children why we were even invested in some of those stories.

Of course, that's followed by an unwinding of all of this stuff. So, we're retracing all of this and then asking the important question, "Did we learn anything from all of this?" Those are the things we really want to go over with the brokerage community, to highlight the point that the business cycle has not been repealed. There are going to be surges in the economy and slowdowns in the economy and possible recessions. Whether we are in one now or not is really irrelevant because the market is in one now for sure.

Some of the things that got thrown out with the bathwater are still needed in portfolio management: diversification; discipline; valuation, or at least an eye on valuation; and asset allocation. Asset allocation is still very key. In some cases it got down to one or two stocks. Many brokers are asking us what sectors are going to lead us out of this, which we really cannot answer because we don't time the market.

The other thing we want to remind them is that it wasn't more than three years ago that there were books being printed and articles being written saying that because of the Internet, because of indexing, brokerage firms and financial planners were dinosaurs, that they were no longer needed in the formula for success by their clients. The fact is that's just not true. Our clients need their help now more than ever before because they need these same messages that we are talking to them about.

TSC: What kinds of concerns are you hearing from these planners on the firing line?

Salners:

We're definitely not hearing the word panic yet.

Surprisingly enough, they are echoing back some of the things we have told them in the past, namely that we are a growth shop. We have some excellent value funds, but most of the $170 billion we have out there is in our growth portfolios. And when growth is out of favor, they expect us to underperform. They understand that. After 15 years of doing this, they understand that when value is in favor, growth may not be, but it will come back

We haven't suddenly gotten dumb, and our philosophy still works, it's just that in that period of time when there is another philosophy in favor, that's what asset allocation is all about. Earnings are still important for any investor with a five-year time horizon or longer.

So we are hearing some optimistic things from planners, and that is reflected in the fact that in 1987, in the space of three weeks, 5% of the assets in mutual funds were withdrawn, and so far this year, there has been less than a half a percent withdrawn. I think the number is 0.3% of mutual fund assets have been redeemed.

Now, it's a huge number because you are talking about a much bigger base than in 1987. But for the most part, the brokerage community has been doing its job in holding investors' hands and investors themselves are not panicking. If you look at the dollar number of assets being redeemed, it's a huge number, but when you look at it as a percentage, it's not that great.

TSC: Since many financial planners' compensation is based on attracting new assets, how are your brokers dealing with withering flows?

Salners:

We have seen a slowdown in the flow of net assets, as has the entire mutual fund industry. It's particularly hit some of our larger funds, which are in a net redemption mode, primarily due to the market and the fact that there's not new money coming in, as opposed to the fact that there is money coming out of the fund. But overall, we are still getting net inflows. And last year, we had net flows of $14.2 billion into our funds, up tremendously from $3.1 billion in 1999.

Industrywide, a slowdown has happened in terms of new assets coming into mutual funds. While they haven't dwindled to nothing yet, net flows industrywide are down as much as 75% to 90% from the rate of inflows at the height of the market just 12 months ago. For brokers compensated on assets under management, a slowdown in new assets coming in is devastating.

Other brokers are paid on a transactional basis, that is, for managing assets. In many cases, they get paid more for managing those assets than they do for brining new assets onto the books. In the long term, the name of the game is bringing more assets onto the books, but in periods of time like this, it is more important for them to keep those assets on the books.

TSC: What are you telling investors to expect in the market right now and how to play it?

Salners:

What we don't want our clients to do is to make the fatal flaw of buying high and selling low. The right time to sell was 12 months ago. That's all behind us now. Now we have to look at the marketplace and ask, "Have we seen the full extent of the bear? If not, how much more will there be chewed away on this market, and is it better to stay where you are and cut back and move to CDs?" We certainly don't think that's what is necessary right now.

We aren't addressing the macro-economic picture, though. We are a bottoms-up manager. We are not a top-down manager. We never have been, nor do we expect to be. We don't even employ an economist here, because we are stock pickers.

We feel eventually -- five years from now, 10 years from now -- when you look back at the stocks that have been the most productive in your portfolio, they are going to be the ones with the best earnings available. Our philosophy has been, and continues to be, to pick those stocks one by one, sector by sector -- the best earnings available.

In terms of specific opportunities, we are also telling brokers that small- to mid-cap stocks are at a valuation, relative to large-cap stocks, on a par. And that is pretty much the bottom in terms of relative valuation. So, the risk associated with small- and mid-cap stocks is not any greater than large-cap stocks. Our fixed-income funds are also doing well this year, which goes back to the point of asset allocation. In fact, we are very glad that we are seeing cash flow into fixed-income funds, and it was in this area that AIM first cut its teeth.

TSC: Given that you are a bottoms-up manager, you must have felt the pain from some of the bad news doled out by many companies recently. What do you say to financial planners and investors on days when a company has announced an earnings shortfall, or when the Dow Jones Industrial Average is falling nearly 400 points?

Salners:

The question comes back down, when you get short-term news, that's not what we focus on here right now. If in fact a company like

Cisco

starts to miss its numbers to the point it no longer qualifies for our funds, then we are going to sell out of it. It's periods of times like this -- if you want to go back to 1991, 1992 or 1987 -- when the purchase of stocks that you make today are what will allow you to be in the top-performing mutual fund long-term.