Michael Lee-Chin gets on the bag (Photo: Jay Shuster)
The Michael Lee-Chin story seemed like it was finished back in 2009. He built a mutual fund giant from scratch, he made himself one of the world’s richest men in the process, but then the markets turned on him. Canada’s guru of buy-and-hold saw his mantra become a Bay Street punchline. He was forced to sell the remains of AIC, the company that had come to define him. His retreat from the investing world brought a merciful close to a humbling chapter for a man unaccustomed to failure. But now he’s back with a new slate of funds. This could be his chance for redemption. Or it could be nothing more than a forgettable epilogue.
When he conceded defeat three years ago and sold his company to Manulife, Lee-Chin agreed to a non-compete clause, which lapsed at the end of September. Now, through his company, Portland Investment Counsel, Lee-Chin is free to give investors the chance to once again buy into his vision of “buy, hold and prosper” through three new mutual funds. But there’s a slight twist. His company will also offer private equity securities, giving clients a chance to invest in companies not listed on any exchange, something Lee-Chin became convinced was necessary over the three years he had to plan his return. It’s a novel offering and a point of distinction in the crowded fund business. But since the private equity products will be reserved for wealthy clients, the fate of the company will depend on the performance of his conventional listed funds, which will bear close resemblance to the AIC products investors ended up rejecting. So Lee-Chin’s comeback is predicated on the same dogma he has always professed. In theory, it should work.
Lee-Chin’s fundamentals are sound. He invests long-term in a limited number of well understood businesses, a model he says emulates the behaviour of the world’s super-rich, who don’t constantly churn their portfolios and who don’t flip their investments when markets dive. But retail investors are a different breed. They obsess over the whims of the market, they get scared and they sell—the antithesis of the Lee-Chin system. Therein lies the tragic flaw of Lee-Chin’s brand of high-conviction, long-term investing for the retail space. “He made some really strong arguments,” says Michael Morrow, a financial adviser in Thunder Bay, Ont. “But clients look at their statements and say, ‘I appreciate your arguments, but I’d really like to make some money.’” This short-term thinking—the bane of Lee-Chin’s existence—waits to thwart him once again. Lee-Chin may very well recapture something of the meteoric rise he authored through the 1990s. But when the bad times come, the Canadian investor will let him down. Again.
From A humble beginning in Jamaica, Lee-Chin came to Canada at 19 to study civil engineering at McMaster University. He started his fund career selling investments door-to-door for Investors Group. In 1987, he bought Advantage Investment Counsel for $200,000, which he built into the country’s largest independent fund company. A student of Warren Buffett’s value investing approach based on hunting for undervalued stocks, Lee-Chin saw great dysfunction in the accepted practice of the fund business. They had stakes in dozens of companies, too many to know well, across several industries. And the big funds turned over their assets far too much. Managers who churned their portfolios inflated fund expenses, eroded returns and shortchanged the investor. Lee-Chin was sure he could do better. Canadian investors, it seemed to him, were a “sea of unwashed people.” He was the man with the soap. “I thought, ‘This is crazy,’” he says. “We have an entire industry, all over the world, behaving in a way that has no resemblance to how wealth is created.”
He launched AIC’s funds with a mandate informed by the financial habits of the world’s wealthy. His funds would invest in industries poised for high growth and hold those securities over the long term. His preferred holding period, he said at the time, borrowing a pearl of Buffett wisdom, was “forever.”
Lee-Chin has always thought of his career as a case study—the man who challenged the Canadian investing establishment and provided the antidote to entrenched mutual fund mediocrity. For the retail investor, he had a better way. He says he still does. He calls it his “righteous premise.” He often appeals to the language of religion to explain his motivations, calling himself a “disciple” of his doctrine of wealth creation. The rationale behind “buy, hold and prosper” is simple and rational. All else being equal, funds with higher rates of turnover have lower rates of return. Buffett’s career alone is evidence enough of the potential of high-conviction, deep-value fund management.
Early on, Lee-Chin proved a worthy Canadian counterpart to Buffett. Money poured into AIC. Over a three-year period beginning in 1997, assets under management rose fiftyfold. By 2002, AIC was managing $15.4 billion. Lee-Chin himself amassed a personal fortune Forbes estimated at $2.5 billion. He embraced the hallmarks of extraordinary wealth—the helicopter, the corporate jet, the bright red Ferrari. A pair of parrots in the lobby of the company’s headquarters was trained to say “buy” and “hold.” The Lee-Chin method worked. Then it didn’t.
Financial stocks like TD Bank and Investors Group accounted for 60% of the holdings of AIC’s flagship Advantage and Advantage II funds. “The asset management business model is the best business model in the world,” Lee-Chin says. It has no inventory, no receivables and no balance sheet risk. But that sector concentration combined with Lee-Chin’s preference for holding only 15 companies or so meant potential for great volatility. “The problem is that in a portfolio that concentrated, you can’t really hide from your mistakes,” says Dave Paterson, a fund analyst at D. A. Paterson & Associates, based in Oakville, Ont.
When the tech bubble burst in 2000, it triggered an extended bear market and brought an abrupt end to AIC’s ascent. Lee-Chin was criticized for missing out on the tech boom, then the rise of income trusts, then the rush to commodities. Those sectors, he explained, fell short of his investment standards: chiefly, that he did not understand them well enough. And to shuffle AIC’s holdings in a down cycle would constitute a betrayal of his core principles. Weathering the storm was part of the deal for his clients. “Michael put a stake in the ground and said I’m not varying and I’m not going to deviate,” says Dan Richards, president of consulting firm Clientinsights. His critics said he was stubborn. He said he was principled. “That great strength can be a weakness if you’re not adapting to the environment that you’re in,” says Jonathan Wellum, who worked side by side with Lee-Chin at AIC for almost 20 years. “That’s a risk you run when you’re trying to be focused in your positions.” Then, as now, Wellum believed in Lee-Chin’s philosophy. There may have been problems in execution, as Lee-Chin himself admits, but turning big ideas into investment practice isn’t simple, Wellum says. “You don’t change the principles. It’s the execution. Warren Buffett is dogmatic, too.”
AIC’s funds stopped beating benchmarks and underperformed other value investing funds. In 2002, Advantage lost 22%, and assets under management began to shrink. Investors, analysts and columnists brayed for change. Lee-Chin held his ground. “I was consciously prepared to let the chips fall where they may, but I was not prepared to lessen my principles one iota,” he says. “We can only act rationally, and if everybody around us wants to be otherwise, we won’t be part of that.” His relationship with his own clients soured. “Buy, hold and suffer,” The Globe and Mail scoffed in a September 2005 article that painted Lee-Chin as obnoxious and obstinate, likening him to Donald Trump. (It also said Lee-Chin “flaunts his wealth,” curiously including a $30-million donation to the Royal Ontario Museum in a list of evidence.)
A stunning 53 consecutive months of net redemptions culminated in Lee-Chin stepping down as CEO in 2006 and handing over control of the funds to Wellum. By July 2009, assets under management had shrunk by 75% from AIC’s peak. To his detractors, the sale was evidence of AIC’s flaws, of the risks of over-concentration and of Lee-Chin’s rigidity. Even judged on the longer investment horizon that Lee-Chin favours, the funds have not fared well. At the end of this summer, the 15-year returns on both Advantage and Advantage II, which Lee-Chin continued to guide in a sub-advisory role until July, were both just in negative territory. “He’s going to have a lot of work to convince people that if it didn’t work over the last 15 years, how will it work over the next five, 10, 15 years,” says Dan Hallett, a director of Highview Asset Management. “The AIC experience has left a very bad taste with a lot of people, and I think it’s even more of an uphill battle than it would be for a startup, to rebuild that confidence, if it can be done at all. I’m not sure that it can.” Lee-Chin says he was always “on the side of right,” and that it was a culture of instant gratification that sank him. “If you can tell me of a better way of creating wealth, I’m all ears.”
Lee-Chin is now 61, and has a plan for a second assault on conventional investing, just as he orchestrated 25 years ago. To his old list of criticisms of the fund business, he has added the absence of private equity in retail investing. It was his own investments in private businesses that Lee-Chin says helped him weather the global financial crisis. Last year, Canadian Business calculated his wealth at $1.73 billion. (Lee-Chin himself is unsure how much money he has. “If you know how much you’re worth, you’re not wealthy,” he says with a smile.)
Private companies are less correlated to global stock markets and macroeconomic conditions. And they’re often run by a limited number of owners who can make decisions autocratically and who have clear incentives to succeed. “They have skin in the game,” he says. “No profits, his or her children become skinny.” Big pension and endowment funds regularly hold private equity stakes, but it’s a crucial component of investing withheld from retail investors, Lee-Chin says. Portland will address this shortcoming. It’s a long shot. Private equity funds are perceived as risky and have their own limitations, like mandatory lock-in periods. Beyond that, the funds will not be listed or issued by prospectus, so only accredited investors are qualified to participate. In Ontario, that means investors must have a joint income of $300,000, investable assets of $1 million, or be willing to make a minimum investment of $150,000. “The rationale for the securities law says that if you have that much money, you can probably do your own due diligence and don’t need a prospectus,” says Douglas Cumming, a finance professor at York University’s Schulich School of Business. So Lee-Chin’s plan to “democratize private equity” will exclude the great majority of Canadian investors who lack the necessary wealth. For them, there will be Portland’s traditional mutual funds, to which Lee-Chin will apply his trademark philosophy. “Not everybody is going to be able to invest in private equity,” Hallett says. “But pretty much everybody needs exposure to stocks and bonds. The success of the company will hinge on that.”
Back in the 1990s, Lee-Chin made a shrewd bet on the financial sector at the outset of a growth period. Now, the fund business is in a very different place. Canadian investors are fixated on the threat of global economic shocks. “Any new entrant’s going to have a tough go, so you’ve got to bring something in that’s highly differentiated and highly value added,” says Jonathan Wellum, who has since left AIC to start his own investing firm. Private equity, which will remain off limits to the investing masses, may not set Portland apart enough. As for the listed funds, it hardly seems the ideal time for “buy, hold and prosper” to recapture the favour of investors. The market chaos of the past four years has left them risk averse and consumed by short-term stock volatility.
To Lee-Chin, the incessant market swings are just further support for a grander investing vision, an idea that investors are ready to embrace again. “They’re all fed up with the volatility of the stock market. This is a tipping point, and the timing is right.” To his critics, he offers his record. “Do they know of a more successful adviser?” he says. Unquestionably, Lee-Chin has made a lot of people a lot of money, which will help win him early support for his new funds. There should be no underestimating his determination and the force of his personality. Yet it’s difficult to see how copying and pasting the AIC model will produce any sustainable success. And Lee-Chin doesn’t let reality get in the way of a good idea. “Given that I have a righteous premise, we will persevere. It’s part of the case study.” He knows what’s best for investors. If only they would listen to him.
