Some days, when he looks back at all the progress since Sept. 11, Jim Connelly says "it seems like 10 lifetimes ago" that terrorist attacked the World Trade Center, killing 38 of his firm's staff.

Connelly, a vice chairman at Fred Alger Management, Inc., which had been located on the 93rd floor of the center's north tower, has been a pivotal member of the team leading the firm's rebuilding process. Among those killed was David Alger, who headed the firm. In response, Fred Alger, David's older brother and the firm's retired founder, immediately returned to lead the shop of 160 employees to recovery. The task ahead was daunting.

While trying to come to terms with the personal tragedy of losing so many of its staff and also resume business, several of Alger's key clients announced within a month after the disaster that they would terminate or suspend their sub-advisory agreements with the shattered firm.

Since the attacks, Alger has become a sort of icon for a mutual fund industry that was hobbled by the disaster and he seemed to personify the industry's troubles in the wake of the attacks.

Prior to Sept. 11, the industry had been struggling in the midst of a market slump. It was also wrestling with increasing pressures from diminished sales. The attacks, which severely damaged the operations of many firms and sparked anxiety among already rattled investors, only made things worse.

"We saw a continuation of what we'd seen for most of the year," said Scott Berry, an analyst at Morningstar. "Interest in money market and short-term bond funds, investors flocking to relative safety- the events of Sept. 11 really pushed that to an extreme level."

But more than three months later, Alger might serve as a different sort of icon - this time representing the industry's steady path toward recovery. The firm has regained many of the sub-advisory relationships it had lost. It has hired 11 new staff, five of whom are well-known alumni who returned in a show of support. And Alger's assets under management now exceed those of before Sept. 11. As of Dec. 14, the firm had $13.4 billion under management, vs. the early September figure of $13.1 billion.

The changes have come so swiftly, the bid to rebuild has been so intense, that Connelly finds himself vacillating between solemn reflection and jubilant boosterism.

"We could never replace the individuals that we lost," he said. "But we have replaced the talent. People are really at the top of their game. They're clicking on all cylinders. We're raring to go."

As a whole, the industry has managed similar recovery. After a sharp dip in stock fund flows in September, flows recovered during October. Stock funds held net assets of more than $3.1 trillion, about 3% more than September's levels. In a nutshell, September's equity fund outflows of $32 billion had reversed in October, amounting to $758 million in inflows.

But there's still a distance to go, which may be more a factor of the troubled economy than the effects of terrorism. The industry is still mired by swooning markets, still wounded by the attacks and largely marked by a brand of bare-essentials thinking that has seeped from the dismal realities of balance sheets into the outlook of many companies' top leadership.

Of course, analysts expect the industry to continue its recovery. Markets will eventually ascend, they say. Investor sentiment will again warm to stock funds. And firms, perhaps with a few adjustments to their distribution models, will return to stronger sales.

Communication Breakdown

One of the most glaring problems that Sept. 11 uncovered, observers say, was that fund companies were ill-prepared to speak to investors, mostly because their relationships with clients are far too impersonal. The issue exposed what many see as a problem with the way the industry handles its clients, that is, talking with them too infrequently. "I think some fund companies did better than others" in making that communication happen, Berry said. "I would say they could have done a better job."

And so, analysts say the legacy of the attacks for the fund industry will likely take the form of a key lesson: Be ready to talk with investors openly and constantly during a crisis.

To be fair, no firm could have realistically anticipated a crisis that would shake investors as badly as terrorist assaults on New York City and Washington, D.C., said Lisa Cohen, a principal at The Collaborative, a sales consulting firm. "It's like they were graded for a class they never took," she said.

But even before Sept. 11, Cohen contended that "The liability of the current distribution model ... is that there is limited contact with investors."

"There needs to be some kind of strategy put in place over the long term," she said. "People are starting to take off the rose-colored glasses and look at some of the issues related to selling mutual funds."

The solution might take the form of better use of technology and wide adoption of walk-in-centers, where clients can stop by and talk to a fund company representative about their assets. And, should firms choose to take advantage of it, the Web will make it easier for fund companies to contact clients at the stroke of a key.

Still, there are other pressing issues confronting the fund industry.

Revenues at fund complexes dipped slightly for the year. New York research firm Strategic Insight expected a decline of $4 billion industry wide, or about 10% of total advisory fees. Analysts said the declines were largely due to decreased U.S. mutual fund sales as well as losses in management fees due to declining net asset values.

Now, firms are naturally hoping a market recovery sometime in 2002 will again spark the interest of more investors, driving sales up and bringing revenues with them. For the firms that had been located in the trade center, that optimism is tainted by solemnity.

"You just stop for a minute or so, you just think of different things or different people," Connelly said. "But, you know, it's important for us to push ahead. We're in good shape here. We're anxious to get this year under our belt and go on to next year. I think it's going to be excellent."

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