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Why battered AIC is not for sale

Entrepreneur Michael Lee-Chin says he doesn't want to give up on his 'dream'


TORONTO -- Billionaire Michael Lee-Chin may wince at seeing the assets of his mutual fund company plunge by about 58 per cent to $6.5-billion over the past six years.

But the Jamaican-born entrepreneur stubbornly refuses to sell AIC Ltd., even as it has suffered from another $386-million in net outflows in the first three months of this year. He says he doesn't want to walk the path of Phillips Hager & North Investment Management Ltd., another formerly independent fund company, which surprised many by selling to Royal Bank of Canada this year.

"We have been approached [by banks]," AIC's executive chairman told Report on Business editors and reporters yesterday in a meeting. "Phillips Hager had pressure from many shareholders. I am not in that position."

Mr. Lee-Chin, whose wide business interests extend to the Caribbean where he also owns a majority stake in Jamaica's National Commercial Bank, said he doesn't want to give up "a dream" of building a firm founded on the buy-and-hold value investing principles of proponents like legendary investor Warren Buffett.

"AIC is the legacy," he said. "The dream has always been to build up a wealth management business ... and behave in a way that is 100-per-cent simpatico with how people become wealthy... .

"We are guardians of that legacy," he said. "In other hands, it won't be the case. It will just be commoditized because that is the most expeditious way to garner assets."

Mr. Lee-Chin acknowledged that AIC's funds have had a very rough ride in recent months because about 50 per cent of its assets are invested in financial stocks, which have been badly beaten up as a result of the fallout stemming from U.S. subprime-mortgage crisis.

But AIC, whose assets have tumbled from $15.4-billion at its peak in 2002, has embarked on a turnaround strategy to try to stem the bleeding by the fourth quarter of this year.

AIC executives say the core strategy will continue to focus on buying wealth management, bank and life insurance companies, while adding new funds in countercyclical sectors like real estate and infrastructure to reduce volatility.

It has launched new global insurance, global wealth management and global bank funds to be run internally. "Coming out of this [downturn], we can have some of the biggest upside moves," AIC chief executive officer Jonathan Wellum said. "But it doesn't mean we know when they are going to bounce back," he added.

AIC is also hiring more external value managers with long-term track records. "We have opted to go after companies with storied histories rather than just hire a high-flying portfolio manager or big-name person," Mr. Wellum said.

"We have to bring the absolute best that we can find out there, and have a compelling reason for a financial adviser to recommend those portfolios," he added.

AIC has also added a new global infrastructure fund to be managed by Chicago-based Brookfield Redding LLC, a unit of Brookfield Asset Management Inc. and a global real estate fund run by New York-based Third Avenue Management LLC.

Chicago-based Ariel Capital Management LLC was hired last October to take over the AIC American Focused Fund from internal manager James Cole after it suffered sharp losses.

"It was a misjudgment of the pullback in the marketplace," Mr. Wellum said, referring to the U.S. stock fund dragged down by battered U.S. stocks like mortgage insurer Radian Group, and home builder D.R. Horton.

It's not the first time that AIC has hired U.S. money managers to diversify its product line. In 2000 - as the technology bubble was bursting - it launched a global technology fund run by San Francisco-based Elijah Asset Management.

"The manager turned out not to be a die-hard value investor," and AIC discontinued that relationship, Mr. Lee-Chin said.

It will take an extraordinary turnaround for AIC to regain its position in the market. Morningstar Canada fund analyst Philip Lee said his firm recently removed AIC Global Bond fund from its recommended list, but not because of any dislike for the way it was being managed.

Rather, there were concerns about AIC as a company, following the departure of three managers over the past year and the risk controls in place for the AIC American Focused fund, Mr. Lee said.

"James Cole was allowed to take very concentrated bets in very risky areas of the market," he said. "He was heavily invested in bond insurers and mortgage-related companies."

AIC is "doing the right things" by adding U.S. money managers with "strong reputations" like Ariel Capital and Third Avenue to its stable of funds, Mr. Lee said. "Is this enough to stem outflows? That question remains to be answered."

© 2007 The Globe and Mail. All rights reserved.

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