AIM's Missed Opportunity

Three AIM funds-- AIM Opportunities I ,  AIM Opportunities II , and  AIM Opportunities III --will soon lose a team of managers. Charles Scavone, Brant deMuth, and Robert Leslie will all leave behind their retail fund-management responsibilities to focus on private accounts at the end of November 2004, after another former team member, Steven Brase, departed AIM Investments altogether in early 2004.

While AIM offers loads of growth funds--and thus employs plenty of growth managers--the firm's Opportunities lineup is different. The funds have the ability and propensity to short stocks and use a variety of derivative instruments, making them more like some hedge funds than any of AIM's other funds. Opps I focused on small caps, Opps II on mid-caps, and Opps III on large caps.

The Opportunities funds clearly require specialized management expertise. But now that the entire team is shifting gears, what will become of its charges? Will AIM do the right thing by its shareholders? In this case, it doesn't look promising.

In a recent SEC filing, AIM announced that Roger Mortimer and Glen Hilton, both of AIM Global Value (AWSAX), will take the reins from Scavone, deMuth, and Leslie. Although the Opportunities funds will retain the ability to sell stocks short and use derivatives and leverage, the funds' revised prospectus indicates the new managers will use a value-oriented approach rather than the growth-leaning one that Scavone and his team employed.

We'd encourage the board to consider another option. Given the specialized investment techniques that the Opportunities managers employed, it makes the most sense for AIM to shut down the funds and return shareholder money, or at least allow shareholders to vote on such an option. After all, shareholders bought the funds expecting a taste of the hedge-fund world, or were perhaps looking for a way to tone down the risks associated with the type of aggressive-growth stock portfolios typical of AIM's growth lineup (and of these funds). But we're simply not confident that the new managers have sufficiently extensive recent experience in shorting stocks and otherwise hedging stock portfolios to be successful here.

We don't mean to begrudge Mortimer and Hilton; they've been successful running the $35 million Global Value over the past three-and-a-half years. And Mortimer, who will serve the Opportunities funds as lead manager, has 10 years of experience in analyzing stocks and building portfolios. But Global Value's prospectus contains no mention of shorting stocks or leveraging. And while an AIM Canadian fund that Mortimer and Hilton manage also uses similar alternative-investment techniques, Leslie, one of the current Opportunities managers who's leaving the U.S. retail-fund world, is also currently part of that management team. Thus, it's impossible to say for sure whether Mortimer and Hilton have hands-on experience with hedging strategies; Leslie could have been handling all the heavy lifting on that front.

Oakmark recently garnered kudos from fund watchers (including us) for shutting down its beleaguered small-cap fund and returning investors' money. In the same vein, a similar move from AIM could also help the firm generate some goodwill--sorely needed since INVESCO, which falls under the AIM Investments umbrella, has become ensnared in the market-timing scandal. The Opportunities funds' relatively small investment-advisory fees--all three currently consume $715 million in assets together and paid AIM Advisors roughly $7 million to manage the funds in fiscal 2003--seem a small price to pay considering AIM runs more than $130 billion in assets overall.