Fund performance is show-
ing signs of revival at AIC Ltd. just as its founder and majority shareholder, charismatic multibillionaire Michael Lee-Chin, is handing over the CEO’s crown to long-time colleague Jonathan Wellum.

The Burlington, Ont.-based company had about three-quarters of its assets under management showing better-than-average performance relative to the industry for the year ended Sept. 30. Its major funds are now benefiting from a cooling off in commodities stocks that had powered the Toronto Stock Exchange and many competing mutual funds in recent years. Resources stocks are deliberately excluded from AIC portfolios because they are cyclical and unsuitable for AIC’s buy-and-hold investment style.

It will be an ongoing challenge for Wellum to revive and maintain the momentum at AIC and win back the confidence of disillusioned advisors and investors. The company is still suffering net monthly redemptions, which have gone on for 53 straight months.

But, in addition to the lift provided by better performance, some favourable winds are beginning to blow on the sales side. The sales/redemption ratio is improving, Wellum says, and he expects the company to report net positive sales by yearend. The outcome is even more probable if the contributions from AIC’s high net-worth investment pools and closed-end funds are taken into account, he says.

“We have not been the ‘flavour of the day,’ and it has been hard to get good performance,” says Wellum, who remains chief investment officer after taking on the CEO title. “Our philosophy is to hold superior businesses and strong franchises that perform well throughout the business cycle, not companies that are dependent on a rip-roaring economy, high commodity prices or other things we can’t predict. We don’t know where commodities will go in the future, but it is unlikely the price of copper will triple again in the next few years. We expect the rate of increase in resources commodity prices to slow down.”

The firm’s flagship, the $1.1-billion AIC Advantage Fund, for example, reported a 19.8% return for the year ended Sept. 30, vaulting it into the top quartile of its peer group, according to Morningstar Canada rankings. AIC’s largest fund, the $1.7-billion AIC Diversified Canada Fund, had an 8.1% gain for the period, putting it in the second quartile.

Lee-Chin’s title has changed from chairman to executive chairman since Wellum’s promotion, but Lee-Chin will still keep a close eye on the strategic and investment decisions made at AIC. Wellum says that Lee-Chin’s high profile and “larger-than-life presence” has sometimes prevented observers from seeing “to the heart of the company” and appreciating the essence of AIC’s philosophy of long-term business ownership with minimal investor taxation. Lee-Chin will now be less visible.

“We are well poised for future growth and have been strengthening and girding management responsibilities to meet anticipated growing demand,” Lee-Chin says, adding that it would have been “easy” for AIC to extricate itself from its redemption problems a few years ago if it had introduced products in the hot sectors, including income trusts and resources commodities. But the company wanted to keep to areas that it perceives will make investors happy with their holding five years from now.

Through affiliate Copernican Capital Corp. , AIC has, therefore, focused on introducing a series of six closed-end funds to invest in established companies in the global wealth-management business. The products have brought in about $250 million in AUM.

AIC is also forging relationships with a handful of globally recognized subadvisors to broaden the AIC product line within its targeted value niche. For example, in April 2005, AIC entered a subadvisory relationship with Third Avenue Management LLC of New York, a deep-value shop led by legendary investor Marty Whitman. Third Avenue manages AIC Global Focussed Fund, which has garnered AUM of $167 million. The fund is off to a good start, with a one-year return of 11.4% — which puts it in the first quartile of its category, says Morningstar.

“We chose not necessarily the easy route but what is best in the long run,” Lee-Chin says. “Given what’s been happening in the commodities market lately, and the fact that we are commodity-free, we are seeing increasing outperformance. Many of our competitors had to be commoditized just to stay close to the market index, but our short-term numbers are now becoming far superior to competitors.”

@page_break@AIC’s retail funds’ AUM are $8.2 billion, a far cry from the peak of $15.4 billion in 2002. And rumours persist that the company is under financial pressure and may ultimately be put up for sale.

Lee-Chin and Wellum insist that the financial situation continues to be solid and, even at the current level of AUM, AIC is a strong and consistent cash-flow generator.

Lee-Chin applies the same standards and vision to his own company as he does to the companies AIC holds in its investment portfolios, and he claims he is a long-term business owner who wouldn’t consider selling just because the business is enduring temporary hardships.

For his part, Wellum says he wouldn’t have taken on the role of CEO without assurance that he would be given time to execute his corporate vision and that Lee-Chin would be there to back him. Wellum owns a small interest in AIC; Lee-Chin controls about 97.5% of the company.

“Michael is serious about continuing to invest in the business, and there is no intention to sell,” Wellum says. “Although he won’t be involved in the day-to-day business, he will be there to be called upon any time to discuss major issues. He has intestinal fortitude and resilience, and his support is critical. He’s the backstop. I wouldn’t have taken the job of CEO if I wasn’t sure Michael would still be around.”

Lee-Chin, who purchased AIC in 1987, when the company had AUM of just $1 million, made the announcement of his withdrawal from the CEO role at the firm’s 20th anniversary gala dinner. He and Wellum first met when they were working out at the gym at McMaster University 18 years ago; the two have been working together at AIC for 16 years.

“We know our respective warts and are happy with each other,” Lee-Chin says, adding that turning the CEO role over to Wellum simply formalizes responsibilities the latter had been assuming over the past few years. “We started the business from scratch and have always had to do many jobs from the get-go to manage, sell and run the business,” says Lee-Chin. “That’s nothing new for either of us.”

There are currently three major divisions under the AIC umbrella: the mutual fund arm, the distribution arm that is contained within Berkshire Investment Group Inc. and the international operations that are primarily carried on in the Caribbean.

The jewel in the Caribbean crown is a 75% interest in National Commercial Bank of Jamaica. But Lee-Chin is spreading his tentacles into other profitable areas of the Caribbean, including transportation, telecommunications and tourism. The same week he announced he was handing over the CEO mantel, he finalized an agreement for the purchase of the Blue Lagoon resort in Portland, Jamaica. The Blue Lagoon is situated on a mineral spring surrounded by natural beauty, and Lee-Chin describes it as “a national treasure.” The resort attracts an elite clientele and many celebrities.

Lee-Chin’s other Jamaican tourism-related investments include the Trident Hotel in Port Antonio and the Reggae Beach resort in Ocho Rios. He also has various communications and entertainment investments, including Radio Jamaica, and an interest in the Port of Kingston, Jamaica. He spends the third week of every month taking care of his business interests in the Caribbean, but remains deeply involved with the wealth-management side at AIC.

Several new funds will be introduced in January. Wellum says they are designed for the long-term benefit of investors, not the interests of investment bankers.

Wellum says that, with the intense focus on product development and research over the past few years, AIC has been somewhat negligent on the sales and marketing side. He plans to address this by making relationship-building with advisors a priority.

“We don’t have the breadth of product of some of our competitors, but our strategy is to be narrow and deep as a value shop,” he adds. “There hasn’t been the best continuity in some of our relationships with the advisor community, and trust needs to be rebuilt. We will be working on providing advisors with tools and regular communications to support their businesses.” IE