(FORTUNE Magazine) – During America's late, great bull market, Janus Capital towered over all other mutual fund companies--and not just because of its location 5,000 feet above sea level. In the span of a decade, Denver-based Janus had gone from managing $3 billion to more than $300 billion. Money was flooding in: Out of all the cash Americans were investing in mutual funds early last year, Janus was capturing more than 30%. Sure, Fidelity and Vanguard were bigger. But Janus had cachet, a certain hot-money swagger. Heck, even President Clinton had stashed a chunk of his IRA in the flagship Janus Fund.

And oh, what results! Most Janus offerings humbled every benchmark in sight. In 1999, 11 of its 14 equity funds, crammed with tech highfliers, delivered better than 50% returns; four hit triple digits. No firm played the momentum investing game better than Janus. It was, quite simply, the hottest mutual fund company on the planet.

But like the mythical Roman god for which it is named, Janus has another face--only, this one's grim. Last year most of its funds fell harder and faster than the broad market. Janus Twenty: down 32%. Janus Mercury: down 23%. Janus Venture: down 40%. And on it went. In the midst of Janus' worst performance ever--more than $50 billion in investors' savings was wiped out--Jim Craig, 44, the firm's highly regarded chief investment officer and designated successor, abruptly announced his departure. As if all that weren't enough, Janus carried on an ugly public fight with its corporate parent.

Today Janus faces perilous times. Its preferred stocks seem to have gone out of style, and its funds are too big to maneuver nimbly. Yet investor expectations remain exceedingly high. With Craig gone, these challenges will fall into what Janus calls the "steady hands" of Tom Bailey, its 63-year-old founder, chairman, and CEO.

For years Janus has cast Bailey as a sort of Wudang warrior--a master who schools his fund managers in the ways of picking stocks, teaches analysts to dive into manholes in pursuit of the truth about quarterly profits, and nurtures the firm's collegial investing culture. Yet Bailey, a beloved figure within the firm, remains a mystery to outsiders. He has a profound distaste for public appearances, and his subordinates protect him like cardinals hovering over an ailing pope.

He is, to put it mildly, a most unusual CEO. For much of Janus' history, he has rarely bothered himself with running the firm, leaving that task to Craig and others. His personal life has been marked by excess. When he does focus on Janus, his management style has been, at best, erratic. With Bailey now back in the saddle, such behavior might seem relevant to Janus investors. In picking stocks, Janus has always prided itself on intensive research into a company's prospects and management. As one portfolio manager explained a few years ago: "If there's ever a management credibility question for me, I walk away."

Yet during four months of reporting, the firm repeatedly refused to grant FORTUNE a formal interview with Bailey. In response to numerous inquires about Janus' fun-loving billionaire founder, spokeswoman Jane Ingalls blurted, "What does Bailey's sleazy past have to do with our business?" Is she right? Read on, Janus investors, and decide for yourselves.

It's hard to explain precisely why Tom Bailey means so much to the high-powered young money managers at Janus. He's not a man of great personal drive or ambition. He has never run money on a billion-dollar scale. He has never worked as hard as they have. Though Bailey has stepped up his involvement since Jim Craig's departure, he still spends just three days a week in Denver. If anything, Janus seems to have grown into the nation's fifth-largest mutual fund company in spite of Bailey, not because of him.

What Bailey has done, however, is establish investing as the cornerstone of Janus' culture. In marked contrast to, say, Fidelity, Janus' fund managers--not the marketing types--call the shots. They have whatever resources they need. They decide whether to close their funds when they get too big. At times they even get to use the company's private plane, which the firm leases to fly Bailey back and forth from his home in Aspen. And they are all fabulously paid. According to public records, Janus' Karen Reidy, 33, made $4.8 million in 1999--as an assistant portfolio manager. The folks running Janus' biggest funds--who get huge bonuses for stellar performance--almost certainly topped $10 million. When Craig departed, after 17 years at Janus, he sold back his Janus Capital stock for $78 million. It's no accident that in a business plagued with turnover, Janus rarely loses a portfolio manager.

But then, Janus has always been different. From the start, Bailey used his firm's Western location to define it as somehow elevated from conventional market thinking. He even named his first offering the Rawhide Fund--before changing it to Janus.

Bailey's own origins are sketchy even to close friends. In a 1994 SEC deposition, he declined to shed light on the correct spelling of his middle name. This much is clear: An only child, Bailey was born in Pittsburgh and raised in Leamington, Ontario, where his father worked as a midlevel executive at a giant H.J. Heinz ketchup plant. He went into business on his own at age 31, after earning an MBA and working as a salesman for a Denver brokerage.

The original Janus Fund, launched in a down market in 1970 with just a few hundred thousand dollars, almost didn't make it. One of Bailey's two early partners, Richard Goldstein, recalls that when he signed on that year, "Bailey had a pair of Gucci loafers, a Porsche, and $2,000 to his name. Janus was basically bankrupt." After converting to a no-load, the fund started growing.

Janus investors might be surprised to learn that the company's founder often described himself as a conservative investor. He was an adroit market timer. Bailey waited out the crash of 1973-74, for example, stashing 80% of his $20 million fund in cash. He was also a shrewd stock picker, focusing mostly on small-cap companies in which he could gain access to management to personally research the business.

Alas, Bailey and his team were also picking some of the same stocks for their personal accounts. In November 1976 the SEC charged Janus' partners with giving themselves more favorable prices on trades made for both the fund and their own accounts--as well as lying about it to the SEC. Bailey insisted he had broken no securities laws, but settled, accepting a two-week suspension from the business. Bitter, he blamed Goldstein--whose heavier personal trading netted a two-month suspension--and ousted him from the partnership. During a deposition on another matter years later, Bailey portrayed himself as a victim: "I had a partner who traded a lot. That was a big problem of his. He was fired, okay? Someone had to take the fall for the rap." Bailey parted ways with his second partner a few years later.

By the early 1980s, Bailey was enjoying more success than he could handle. The Janus Fund's performance (18% annual returns for more than a decade) had won notice in the business press. In the resulting surge of sales, the fund sold more shares than it had legally authorized, leaving it oversubscribed. The mess took months to straighten out--thousands of investors had to be offered their money back--and triggered a class-action lawsuit. (The suit was eventually settled.)

Janus was growing far faster than Bailey had ever imagined. He never wanted to build an empire; he often said he intended to close the Janus Fund when it hit $75 million. By 1984 it was already three times that size. To manage the burgeoning business, Bailey signed on a CPA named Jack Thompson, who would become chief operating officer, and a gifted new portfolio manager--a soft-spoken 26-year-old Alabaman named Jim Craig. That same year he took an even bigger step: He sold most of the firm.

The buyer was Kansas City Southern Industries, a century-old railroad company that had been dabbling in the financial-services business since the 1960s. In hindsight, KCSI's purchase of 80% of Janus for some $14 million was a steal. But at the time both Bailey and his terminally ill business manager, William Mangus (who owned 41%), were eager for a payoff.

Left with 17% of the stock after the deal closed, Bailey made out like a bandit. He had negotiated an extraordinary contract provision: He maintained absolute control over Janus' investment operations--even its board--as long as his equity stake exceeded 5% and he remained president of Janus. Over the years, KCSI executives would treat Bailey and Janus with such deference that Janus executives smugly came to refer to their parent company as "the 80% minority owner." The contract also guaranteed Bailey the right to sell his remaining shares to the railroad at a price of 15 times Janus' after-tax earnings per share--a handsome multiple at the time. Finally, it dictated that 90% of Janus' profits be paid out in the form of dividends. In 1999 this arrangement paid Bailey, who still owns 12.2% of Janus, about $25 million. Bailey's shares today are probably worth over $1 billion.

When Tom Bailey sold the majority stake in his company, many of his friends and business associates expected him, as one put it, "to hit the beach." While his deep-pocketed corporate partners spoke of Janus' someday managing billions, Bailey displayed little appetite for the heavy lifting needed to make that happen. As he signed on more managers, he seemed to be plotting his exit strategy.

Bailey worried that spending money might jeopardize his buyout multiple--a concern he openly expressed in 1986, when he recruited a young fund manager named Tom Marsico from Wall Street's Fred Alger Management. Bailey calculated Marsico's price at about $100,000--$92,000 in starting salary, plus miscellaneous expenses. Recalls Marsico: "When he hired me, he said, 'This is costing me a million and a half dollars, because I can sell the company at 15 times earnings.'"

Even before Marsico came onboard, Bailey had stopped running money entirely. Although Janus officially dates Bailey's retirement from active portfolio management to 1986, Thompson says it was clear that Craig was calling the shots at the Janus Fund by 1984. (Craig declined comment.) Marsico, in turn, took over the firm's struggling new offering, Janus Value, whose manager had washed out. He recast it as Janus Twenty--a concentrated growth fund that would pioneer the firm's shift to a riskier investing style. Marsico's performance there catapulted him to industry superstardom.

Although the mutual fund industry was starting to boom, getting Bailey to approve even $150,000 for a marketing and PR department took more than a year. "He didn't think it was a fruitful use of funds," says Thompson. "He had all the money he ever dreamed of. He wasn't motivated to grow the business."

Others stepped in to fill the vacuum. Marsico established the crack research team that is now Janus' trademark. He raided his old firm Alger for three future Janus stars: Helen Young Hayes, who runs Janus' two international funds; Warren Lammert, who oversees Janus Mercury; and Jim Goff, manager of Janus Enterprise. And Bailey? "He was supportive of these ideas, but he didn't go out and find these people," Marsico says. "In the early days the three people that worked at growing the firm were myself, Jim Craig, and Jack Thompson."

In fact, while Bailey remained Janus' chairman, CEO, and president, by the late 1980s he was out of the office more often than in it. He didn't even live in Denver anymore; he had moved with his wife and two children to Vail. "He'd be gone a month at a time," says Thompson. "I remember our head trader saying, 'This is awful--he didn't used to be this way.'" Marsico says Bailey averaged "a couple of days a month" at the Denver office. Morgan Stanley Dean Witter chief U.S. investment strategist Byron Wien, an old friend who regards Bailey as "a really good leader," says his work habits always oscillated. "He's very intensely involved--and then he's not," says Wien.

What was Bailey doing? By all accounts, having himself a pretty darn good time. He'd always approached work in a self-consciously laid-back manner. In one of the first MONEY articles about the Janus Fund, Bailey was photographed holding a pool cue; for Business Week, he posed soaking in the hot tub at his home in Vail. During Janus' early days, Bailey even held down a part-time job as a ski instructor. (Friends quip that he did it to cut lift lines.)

After selling to KCSI, Bailey spent more time skiing, traveling, and fishing--as well as pursuing other forms of recreation that he'd openly indulged in for years. "He was into marijuana and cocaine," recalls Bailey's ex-partner Goldstein. "We'd go camping, and he'd be doing drugs." (Janus says it never comments on the personal lives of its employees.) In Vail, Bailey owned part of the wildest bar in town and hung out with successful middle-aged men who partied like frat rats. In the early '80s he invited a group of his buddies on an annual fly-fishing pilgrimage to Montana--an event he dubbed the "Bob Dope Classic." "It was the kind of behavior that we wouldn't want our children to be involved in," says Vail stockbroker Merv Lapin, an old Bailey friend who attended more than once. "It was wild on all fronts."

Janus trustee Mike Herman, former president of the Kansas City Royals, serves as Bailey's business advisor and brokered the KCSI sale. A regular on the Bob Dope trips, Herman says Bailey has always done whatever he wanted. "There are certain people who just don't fit into big companies. Tom's ambitions were, 'I have some fun; I make some money; I can fish.'"

Bailey's indulgences--besides keeping him away from the office--at times intruded on the business. Two early Janus employees say Bailey had them cover for him with his wife when he was meeting other women. (In 1990 he divorced and moved to Aspen.)

When Bailey did involve himself at Janus, the results sometimes were not pretty. On one occasion, Thompson looked on with growing discomfort as Bailey questioned a female finalist for a key job about her personal history--asking first whether she was married, then why she didn't have children, then whether it was "physically impossible" for her to bear children. During a late 1980s orientation session with two dozen Janus employees, Bailey opined on the importance of humility. "Big egos have killed more Jews on Wall Street than Hitler," he declared. One horrified employee quit on the spot. Bailey later apologized. (Janus declined to comment on these incidents.)

By the early 1990s Janus had developed an unwieldy management structure. Marsico and Craig were building the investment team; Thompson ran the business operation. With Bailey's blessing, Janus had finally launched an aggressive marketing campaign. The new PR chief cold-called business reporters; the firm spent millions on direct-mail and media ads. Even while pushing the brand, Janus added distribution channels, setting up new funds, jumping into Schwab's OneSource network, selling funds with sales charges through an insurance-company partner, and going after institutional business.

Meanwhile the firm made a fundamental shift in investing strategy that would ultimately beget both its eye-popping results in the late 1990s--and its nightmarish record in 2000. Earlier in the decade, Janus had moved to cash, shunning tech and other high-P/E stocks; the result had been three years of mediocre returns. After that, "growth at a reasonable price"--a vestige of Bailey's old defensive approach--went out the window. Craig, who had been the most cautious (he once declared that if a growth stock hit a P/E of 30, "I can assure you I won't own it"), led Janus' plunge into tech shares with huge multiples--and rode the glorious wave (see box). It was precisely the right strategy for the moment.

But managing all that success wasn't easy. Back-office employees were drowning in new accounts; investor calls were backing up; the portfolio-management team needed beefing up. "We had to keep it from becoming so successful that it exploded," says Thompson.

Tom Marsico, in particular, was unhappy with how Janus was being run. It had taken him nine years just to get Bailey to give him and Craig stock in the private company. A driven and ambitious man, Marsico was acutely aware of his role in building the business--and he saw Janus' potential to become an industry giant. A passive, part-time CEO, he believed, wasn't going to make it happen.

Bailey buddy Herman, who had brokered the deal that distributed stock to key players within the firm, also expected Janus to grow rapidly. In a January 1995 letter obtained by FORTUNE, he told Bailey that Janus shares could triple over the coming decade. "Unfortunately," Herman warned, referring to some of the firm's new portfolio managers, "the 'rock star attitude' of the young management at Janus could prevent us from achieving these numbers." Herman urged Bailey to "create a culture that makes our associates understand that they are shareholders." Specifically, he advised Bailey to hold monthly meetings with the new shareholders in which everyone would focus on ways to boost profits. He also advised Bailey to "create a backup plan for the fund managers so he is not constantly held hostage and blackmailed by these young associates."

Bailey did begin convening monthly meetings of the firm's newest shareholders--including Marsico, Craig, Goff, and a few others. But the meetings seemed to make matters worse, with managers questioning one another's decisions. The sessions became known internally as "viper meetings." When COO Thompson--in the middle of a divorce--decided to quit later that year, Bailey handed substantial operating authority to the new committee, triggering even more conflict.

Marsico had also been unhappy with Janus' relationship with KCSI, which he considered a terrible fit. Although the railroad never meddled in Janus' business, Bailey and KCSI's CEO, a verbose, Harvard-educated lawyer named Landon Rowland, had never gotten along; what's more, Janus was well on its way toward dwarfing its parent. Marsico tells FORTUNE that during a market downturn back in 1987, he urged Bailey to attempt a leveraged buyout of Janus--when it could be done for a modest price. Bailey wasn't interested. "He said he didn't want to take on that level of debt," recalls Marsico. In the mid-1990s, Marsico attempted to take the problem into his own hands. He approached Charles Schwab, a golfing buddy, about buying Janus. At Marsico's behest, Bailey discussed the matter with Schwab, but neither side wanted to pursue the deal.

In 1997 a deeply frustrated Marsico attempted a coup. Marsico--who has never previously discussed these events in detail--says he attended a Janus board meeting in Hawaii, at which "I discussed my visions for the company, where I thought we needed to go. I thought there needed to be a different structure." Specifically, Marsico proposed that he take over as CEO.

Then approaching 60, Bailey seriously entertained the idea during a month-long trip to Argentina after the board meeting, according to a close friend. "Marsico thought it was time for Bailey to move on--and Bailey kinda thought that was right," he says. "Bailey loved Marsico and thought he was a terrific portfolio manager. But there was a side of Marsico that made him less effective as a leader." When Bailey discussed the idea with other Janus managers upon his return, many objected, voicing concern about Marsico's intense, often abrasive style. Attempting to bypass Bailey, Marsico next took his case to Rowland in Kansas City, but the KCSI chief refused to intervene. By then, says Marsico, "I really had pushed the envelope as far as I could push it." Herman met with Marsico to negotiate generous terms for his resignation.

The abrupt departure of Janus' biggest star--officially, because of "philosophical disagreements"--was big news in the financial press. But within months Marsico fulfilled his desire to be his own boss, opening his own firm a few blocks from Janus. In its three years Marsico Capital has done well for both investors and Marsico himself. Last year he sold Bank of America the 50% interest in the firm it didn't already own for $950 million. Marsico and his family will net more than $500 million in the deal. As for Marsico's current take on his old Janus boss: "Tom and his organization should be congratulated," says Marsico. "The returns were the returns--and they were on his watch."

Bailey's "unique leadership skills" deserve more than faint praise, says spokeswoman Ingalls. "Tom is a leader who believes in hiring smart people and letting them do their jobs, acting as a sounding board and final decision-maker when appropriate." Janus' greatest growth occurred after Marsico and Thompson were gone, she notes. "Certainly Jim Craig and Tom Bailey deserve credit for much of this....And, of course, only Tom Bailey has been here since the beginning."

In 1999, two years after Marsico's departure, Janus' normally tight-lipped leaders did something extraordinary: They launched a highly public, 15-month-long war against their corporate parent. Their target was KCSI's plan to include Janus as the main attraction in a spinoff of its entire financial-services arm. Called Stilwell Financial, the new public holding company would combine Janus; Berger Funds; a British pension fund manager called Nelson; and a minority interest in DST, a firm that does back-office work for mutual funds. Janus wanted to be spun off alone.

Through its official spokesman, Janus warned in the Wall Street Journal and other publications that the Stilwell plan might destroy its unique, fragile culture. Last May--just two months before Stilwell became a reality--Janus darkly suggested that the move could trigger defections from its all-star lineup of portfolio managers. No one had actually decided to leave, added the Janus mouthpiece, but "each manager will have to take his or her counsel." It was not the sort of comment that gives investors confidence in the stability of the firm managing their hard-earned savings. In the months to come the collapse of the markets and Craig's departure reinforced investor anxieties. Janus' clumsy attempt to incite a populist uprising had left a self-inflicted wound.

What made the PR campaign all the more inexcusable was that this fight was a fiasco from the start. Bailey didn't even make his case to the KCSI board until March 1999--more than a year after the railroad had announced its restructuring plans and after an IRS ruling giving tax-exempt status to the deal was already in the works. That handed Rowland an easy out.

In June 1999 the KCSI board granted an audience to a Janus delegation--including Bailey, Craig, Janus Twenty manager Scott Schoelzel, and two other portfolio managers--at a Manhattan hotel. A Wall Street Journal account of the meeting had Bailey advising his team to speak from the heart, without prepared texts. But a document Janus left behind details a carefully scripted pitch, complete with cues for Bailey's introductory remarks ("Tone=non-confrontational"). According to the document, the Janus group asked the KCSI board to appoint a "nationally recognized investment banker" to evaluate the Janus-only spinoff, which they insisted could be completed by year-end. "We must act now," Craig told the KCSI directors. They did--dismissing the Janus plan.

Janus, which provides more than 90% of Stilwell's revenues, had argued that lumping it in with the smaller firms would produce a lower market multiple and incur needless overhead. Janus also said it needed direct equity to retain talent. Yet even some of Bailey's friends concede that it is hard to imagine his providing the sort of visibility and gravitas that investors expect from a public-company CEO. Wien, for one, admits that Bailey would "probably not" be well suited for such a role.

On Dec. 14 in Denver, at an unusual year-end media roundtable hosted by Bailey and his investment team, Janus tried to put the genie back in the bottle. The "civil war" was an "overblown" media concoction, Bailey insisted. "Stilwell, to me, is just like the railroad....Is it a workable structure? Absolutely. The culture of Janus is totally in place."

For better or worse. Craig's departure has set up a struggle among seven or eight in-house candidates to succeed Bailey, who has said he has no intention of quitting anytime soon. Schoelzel, who spearheaded the Stilwell fight, seems to have emerged as a serious contender. In the final months of 2000, Janus began seeing tiny outflows from its funds. Whether that trickle will turn into a flood depends on the ability of the firm's vaunted stock pickers to adapt to the rapidly shifting market. We'll soon find out whether Tom Bailey can put Janus' best face forward.

FEEDBACK: pelkind@fortunemail.com

EDITOR'S NOTE: Janus Capital is the largest investor in Time Warner, parent of FORTUNE's publisher, and in AOL. Writer Peter Elkind has money invested in both Janus and Marsico mutual funds.