Buy, hold, and prosper - Cover Story - investment strategies

Black Enterprise, August, 2002 by Matthew S. Scott

Lee-Chin is still an active money manager, picking securities for the Advantage Income Equity Fund and the company's two Advantage Funds--a total of $3.6 billion in assets--while personally overseeing a book of clients worth $99 million. Some of his clients date back to his days at Investors Group.

Over the years, Lee-Chin has gained a stellar reputation. Since 1992, the Advantage fund has been Canada's top performer, producing an average return of 17% a year. In 1996 and 1997--two of the fund's best years--it showed gains of 66.5% and 43.3%, respectively. And during the last two years, the toughest for world markets in roughly a decade, Advantage showed an impressive gain of 26% in 2000 and a loss of 4% in 2001, faring far better than most of its Canadian competitors.

Lee-Chin produced these returns by focusing on a narrow group of stocks. His mandate: A fund's portfolio should never exceed 25 "great" businesses. For example, 60% of Advantage's holdings are concentrated in only five companies. It's Canada's largest shareholder of Berkshire Hathaway and Toronto Dominion Bank (the parent of TD Waterhouse). The fund is also the world's eighth largest shareholder of Merrill Lynch, as well as the largest shareholder of AMVEST Capital (AIM/Investco Mutual Funds) and Loblaws Supermarket chain, which controls 35% of the grocery store market in Canada.

So just how did Lee-Chin make these picks? Before he and his portfolio-management team decide on an investment, they adhere to tight criteria. They must completely understand the business, ensure that a given company's management is "honest and competent," determine the prospect's long-term competitive advantage, review the viability of the industry, and evaluate if share prices can be purchased at a discount. "Lee-Chin's area of expertise is financial services, so that's what he mainly invests in, and he's been having great success doing it," says Aaron Brown, analyst for Toronto-based Fund-Monitor.com Corp. "When he bought AIC, it was just some tiny firm with under a million dollars in assets. Now it's one of the largest mutual fund companies in Canada." Lee-Chin's investment approach, however, comes at a steep price for investors. The funds have an average annual expense ratio of 2.5%, reportedly 50% more than the cost of a typical U.S. Fund.

READY FOR THE WORLD

Besides performance, Lee-Chin seeks to grow AIC by acquisition. In fact, his recent deals position AIC to become a global player. First, he increased a 20% stake in Georgian Capital to 75% in early April of this year to establish a new and lucrative investment beachhead. It has been a good fit: Georgian's principal, Jonathan Wellum, is well schooled in the AIC method because it was the launching pad for his career in 1990. "[Wellum's] focus was on building a business with high net worth and institutional clients," Lee-Chin explains. "We focus on the mainstream retail clients, so the two businesses are complementary to each other."

The next acquisition: 75% of Elijah Capital Management in late April of this year. The move solidifies AIC's thrust into the management of technology issues. Once again, Lee-Chin struck a relationship-based transaction. Elijah has managed AIC's Global Technology Fund since 2000. In addition. "[AIC gains] the opportunity to access the institutional market in the United States as well as explore other opportunities to offer Canadian asset managers experience in the U.S. market," says Ron Elijah, the firm's CEO and research director.