(FORTUNE Magazine) – On one level the story of Pilgrim Baxter--the investment management firm named after famed momentum investor Gary Pilgrim and salesman extraordinaire Harold Baxter--is a simple tale of the bull-market boom, of interest only to stock market aficionados. During the first half of the decade, its flagship mutual fund, PBHG Growth, topped the charts (and the S&P 500) year after year. Assets mushroomed from $3 million in 1992 to more than $6 billion by mid-1996. Baxter's daughter Christine became a twentysomething Wall Street wunderkind, scoring spectacular numbers with the wildly successful PBHG Emerging Growth fund. In 1995 Pilgrim Baxter sold out to United Asset Management for an estimated $135 million. It immediately became the shining star in UAM's portfolio of 43 investment-management companies, and last fall Pilgrim Baxter lured fund superstar Paul Hondros away from Fidelity. His goal is to double Pilgrim Baxter's assets in three years and turn it into an industry juggernaut.

But Pilgrim Baxter is also a cautionary tale of the challenges and perils of the fast-moving mutual fund industry, and as such is of interest to anyone who has money in a mutual fund--almost anyone, that is, reading this magazine. Pilgrim Baxter, which had over $20 billion in assets in late 1996, has been struggling ever since and now has only $15.5 billion. PBHG Growth lost money in 1997 and is lumbering behind its peer group this year--a performance that is damaging the firm's franchise. The story even has elements of Dostoyevskian doom: Early this summer, while Pilgrim Baxter was fighting many other battles, star technology manager John Force wrecked his car. The driver of another car was killed, and Force was charged with homicide by vehicle while driving under the influence.

What made Pilgrim Baxter hot and attracted all those billions was the idea, and success, of momentum investing--buying companies whose earnings are growing faster and faster each quarter on the theory that ever-accelerating growth can justify astronomical P/E multiples. It's an inherently high-risk, volatile style of running money, and one that worked wonderfully until mid-1996, when many growthy tech stocks beloved by the mo-mo crowd--such as Ascend, Cascade, and Boston Chicken--began to fail to live up to expectations. Since then big blue chips have been the rage, while most Nasdaq stocks are suffering through a bear market. Now Pilgrim Baxter is trying to expand its product offering so that investors don't have to go elsewhere to get funds that are keeping up with the market. Pilgrim Baxter's most dramatic departure from the growth-at-any-price game is its move into value funds, which began in late 1996 when the firm agreed to acquire value manager Newbold's, another subsidiary of UAM. "We feel it's essential that we extend our competencies in order to become a world-class organization," says Hondros.

At the same time, Pilgrim Baxter is tackling another challenge. Historically the firm sold its funds directly to individuals without a sales charge, or load. But despite all the hype about do-it-yourself investing, some 65% of funds--not including 401(k) money--are still sold through intermediaries like brokers, with loads. In early 1998, Pilgrim Baxter unveiled a family of load funds. Selling this way is, if anything, tougher than selling to individuals. "Brokers are as overwhelmed as consumers," says Andrew Guillette, a consultant at Cerulli Associates.

These are smart initiatives, but they are risky and expensive. And Pilgrim Baxter's parent, UAM, has its own problems. Clients have been yanking money away for years. Pilgrim Baxter was supposed to be its salvation, not another headache. One person close to the situation says that a deal was in the works to sell 50% of Pilgrim Baxter to a major insurance company but that it's taking a worryingly long time to happen. The sticking point: Pilgrim Baxter's principals want an equity stake.

Could Pilgrim regain its golden touch? More to the point: Should investors stick around to find out? With so many alternatives, it's always tempting to flee. The best reason to believe in the firm's future may be the fact that the principals want to put their own money at risk.

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