AIC Ltd., the Burling-ton, Ont.-based mutual fund company founded by billionaire Michael Lee-Chin, is struggling to halt a six-year avalanche of redemptions that has reduced the firm to less than half its former size.

AIC executives, including executive chairman Lee-Chin, have been traversing the country in an effort to garner support, meeting with advisors, analysts and reporters. They’re talking up a perceived buying opportunity in the financial stocks that anchor AIC fund portfolios, as well as the sterling track records of an elite handful of value-oriented subadvisors who are “buttressing” AIC’s traditional fund lineup with some new niche products.

Eric Valderrama, vice president of national sales at AIC, says the company’s intention is to be a “value aggregator” and develop a niche as the leading value shop in Canada. He stresses that AIC is not moving away from its “buy, hold and prosper” investment philosophy, but is simply augmenting the team with additional talent.

Third Avenue Management LLC of New York has been chosen by AIC to manage the newly launched AIC Global Real Estate Fund, one of five new global specialty funds launched in the past few months. The other newcomers to the family are AIC Global Banks, AIC Global Insurance, AIC Global Wealth and AIC Global Infrastructure. Other subadvisors to these new AIC funds include Ariel Capital Management LLC of Chicago, Loomis, Sayles & Co. LP of Boston and Brookfield Redding LLC of Chicago.

“We are bringing fantastic talent on board and this is getting people excited about AIC again,” says Valderrama. “The managers we’ve partnered with have long histories of making money and a disciplined investment process that’s repeatable.”

AIC is taking its cue from what’s been working for the firm during difficult times. A bright spot in the gloomy AIC lineup during the past couple of years has been AIC Global Focused Fund, managed by Third Avenue. Currently AIC’s biggest seller, the fund has shown an average annual gain of 5.5% since its inception in July 2005, and has garnered about $650 million in its various classes.

Third Avenue has a long and impressive U.S. history as a deep value manager under its legendary founder, Marty Whitman. AIC hopes to replicate this fund’s success by putting Third Avenue and other talented subadvisors in charge of more funds in its stable. “Third Avenue represents our first big subadvisor relationship and is an indication of the success of the strategy,” says Valderrama. “We are hiring best-of-class managers.”

Meanwhile, AIC executives are anticipating strong returns ahead in the financial services sector, currently depressed by the collapse of the U.S. housing market and the credit problems that have spread throughout the global banking system. World-class financial companies are on sale, says Jonathan Wellum, AIC’s chief investment officer and CEO, presenting a rare opportunity for value-seekers.

“Global financial companies have gone through a shellacking in the past eight months, and it’s a great time to be looking for opportunities in this space,” says Wellum. “Wealth management has always been a key area of AIC and we’re not moving one inch from this strategy.”

Although it’s hard to argue with the view of the charismatic Lee-Chin that wealth is built through the long-term ownership of superior businesses, AIC has fallen down in implementing this strategy. The flagship $772-million AIC Advantage Fund, for example, has underperformed both the broad S&P/TSX 60 index and the TSX financial index. According to Morningstar Canada, AIC Advantage showed a feeble average annual compound return of 0.4% for the 10 years ended March 31, the worst 10-year period since its 1985 inception and a far cry from the 7.8% average annual return shown by the S&P/TSX. By contrast, the fund’s best 10-year period was the 10 years ended Oct. 31, 2000, when it averaged 24.7% a year. The fund has been a fourth-quartile performer over one-, three-, five- and 10-year periods.

Poor performance in some of its biggest funds has driven advisors and their clients away from what was once a hot fund family. AIC’s mutual fund assets have shrivelled to $6.5 billion from a high of $15.7 billion in 1995. About half of these assets are invested in companies related to financial services: banks, brokerages, money managers and insurance companies. AIC has always been a big believer in financial services: in the 1990s, publicly traded companies in this sector fuelled the phenomenal growth in AIC portfolios as Canadian baby boomers flocked to mutual fund management companies.

@page_break@“AIC has made some serious mistakes in the selection of specific stocks and clearly in the U.S., it recently misjudged how bad things were for some companies,” says Rudy Luukko, investment funds editor at Morningstar Canada in Toronto. “Poor returns in some core funds are weighing heavily on AIC and a lot of investors have deserted them.”

In a bid to rescue the ailing AIC American Focused Fund, which dropped a painful 41.1% in the year ended March 31 after a premature investment in the U.S. mortgage insurance and homebuilding industries, AIC has taken the reins from fund manager James Cole and handed them to Loomis, Sayles. Cole will now be free to focus on the handful of Canadian equity, balanced and dividend income funds he also manages. Although he remains with AIC, portfolio managers Anne-Mette De Place Filippini, who headed the global team, and Peter Hofstra, who managed AIC Diversified Science & Technology, have departed.

Even if AIC is successful with its turnaround strategy and manages to deliver impressive performance, it may take some time to regain the trust and loyalty of the advisor network. Advisors who defected from the company in recent years complain about high turnover among the sales representatives and a lack of communication from AIC on the fund performance issues.

Valderrama says AIC’s sales department has been restructured to become more efficient, with clearer lines of reporting and responsibility. AIC is also spending heavily on advertising to increase consumer awareness of its brand. In 2007, AIC won a marketing award at the Canadian Investment Awards for its “value of commitment” campaign.

“We want people to understand our commitment to our investment philosophy,” Valderrama says. “It’s easier for advisors to talk about AIC when it’s a recognizable name.”

The jury is still out on whether AIC can recapture its lost glory, but industry consultant Dan Richards, president of Strategic Imperatives Ltd. of Toronto, says there is a long list of fund companies that have fallen out of favour but managed to recover, including AGF Funds Inc., Mackenzie Financial Corp. and Fidelity Investments Canada.

“None of these companies were in the doghouse for as long as AIC. But there is ample evidence that fund companies with negative momentum can turn the tide,” he says. “In some cases, these companies have done it by launching a new product; in others, by bringing in star managers or acquiring a strong franchise through acquisition. AIC has partnered with a strong team of subadvisors and introduced some new products. Now they’re out there, aggressively telling their story.”

A still confident Lee Chin says AIC funds should be a core holding in every portfolio, and he wants a bigger piece of the investment “wallet.” AIC is holding fast to its value investment philosophy and has no intention of becoming just another commoditized fund “supermarket” no matter how long the redemption streak lasts at AIC.

“The history of financial services is one of longevity and massive profitability, and the financial sector will continue to be our anchor,” says Lee-Chin, whose long-term buy and hold philosophy also applies to his controlling stake in AIC. “We will continue to be patient. Every dog has its day.” IE