Michael Lee-Chin Invests in a Region He Says Is Poised for GrowthPublished: March 16, 2006 in Knowledge@Wharton
Michael Lee-Chin has seen his financial philosophy tested in the new millennium.
For nearly two decades, his approach -- focused on buying and holding a concentrated portfolio of stocks -- helped his company, AIC Ltd., grow into one of Canada's largest sellers of mutual funds. But lately, as the performance of AIC's funds has slumped, customers have exited. According to Morningstar, the mutual-fund research company, AIC's flagship, AIC Advantage, recorded net redemptions -- more money flowing out than in -- for 39 straight months through September. The Toronto Globe & Mail newspaper claimed that the privately held company's mutual fund assets under management shrunk by more a third during that period, dropping from about $15 billion to less than $10 billion.
If accurate, the Globe & Mail's numbers underscore an abrupt reversal for a firm that boomed with the bull market during the 1990s. From 1995 through 1999, AIC's assets under management grew more than fifty-fold. Lee-Chin's company has long specialized in investing in the financial sector, which soared during the 1990s, while shunning the energy industry, which lately has surged.
Lee-Chin, who spoke at a recent Whitney M. Young Memorial Conference sponsored by Wharton's African American MBA Association, noted that during his firm's recent difficulties, he has drawn inspiration from a painting that hangs on the wall of his home. It depicts slave women, carrying bundles of sugar cane from the fields. "The people in the painting ... didn't have the opportunity to dream, to control their future, to have ambition and freedom," he said. "All of us are the product of their efforts, and we can't let them down."
One way in which Lee-Chin, a Jamaican native, has tried to repay that debt is by investing in his home country's National Commercial Bank. In 2002, he purchased 75% of the bank. When he bought his stake, NCB, which once had turned down his father's application to be a teller, was near bankruptcy. "People were picking at its carcass. We had to boost morale, regain the confidence of the [community] and the financial sector, change the back office and give the bank a purpose."
Banks, in particular, depend on the economy in which they operate; they sink or swim with the local business climate. If the economy grows and firms seek and repay loans, banks thrive. If the economy stagnates, loan demand and repayments sag, and banks falter. Consequently, under Lee-Chin, NCB adopted a strategy of trying to simultaneously spur its own growth and that of the Jamaican economy. It rolled out a credit card, called the Keycard, which matches customer spending with scholarships for Jamaican students. "We have an 80% market share, and 1% of the revenues is plowed back into education through the Jamaica Education Initiative," he said. "That paid for 250 scholarships last year."
In addition, to help Jamaica beef up its financial capital, AIC reinvests NCB's earnings in Jamaica rather than repatriating them to Canada. Shipping the money back to Canada "would be wealth destroying for Jamaica" and would thus undermine NCB's long-term goals, he said. Plus, as a Jamaican, Lee-Chin doesn't like the idea of his native land being a mere bank colony of his adopted home. "When I visited England, I was impressed by all the beautiful buildings," he noted. "But I realized that they were built on the backs of the colonies."
As his banking venture in Jamaica suggests, Lee-Chin has shown both financial ingenuity and a flair for marketing throughout his career. A centerpiece of his marketing has been his own rags-to-riches story. He was born in Port Antonio, formerly a center of the Jamaican travel trade and now a favored destination of eco-tourists trying to escape the hubbub of Kingston and Montego Bay. His Chinese-Jamaican parents, both store clerks, had nine children. For college, Lee-Chin headed to Canada and the engineering program at McMaster University. After his freshman year, he found himself running out of money and worried that he wouldn't be able to finish his degree. With the last of funds, he bought a plane ticket back to Jamaica.
Once there, he didn't set out for his hometown. Instead, he headed to Kingston, the capital, and asked for an audience with the prime minister. There, he made a pitch: If the government would give him a scholarship to finish his degree in civil engineering, he would return and apply his education and expertise to his home country. He left that day with a check for $15,000. As promised, he returned to Jamaica after graduation in 1974, taking a job as a highway engineer. Within two years, he decided to return to Toronto where he eventually found a job as a broker. It was the start of his financial career.
In 1987, he bought Advantage Investment Counsel for $200,000. At the time, it had less than $1 million in assets under management. Within five years -- which Lee-Chin calls the "natural gestation period for a business" -- it had grown to about $8 million under management. With a five-year track record, the firm started to draw attention and, by the mid-1990s, it had reached $200 million under management. Then the boom period hit, and it grew to $13 billion by the end of the decade.
Part of Lee-Chin's approach to business was his practice, early in his career, of studying successful investors, including Warren Buffett, whom he calls a role model, and trying to puzzle out their methods. That enabled him to identify certain strategies which many of these people followed. For example, they owned a few high-quality businesses in growth industries, and they deeply understood those businesses. They invested for the long term, and, where possible, they leveraged their investments with other people's money. Lee-Chin said he has applied the same ideas at AIC.
His observations also led him to conclude that one common principle of investing -- diversification -- didn't make sense. "The average mutual fund owns 100, 200 or 300 stocks and turns them over every six months," he said. "How is it possible to understand 200 to 300 businesses? Our mutual funds aren't managed traditionally. They hold 15 to 17 businesses in strong long-term growth industries." AIC Advantage, for example, held 13 stocks at the end of September. Since inception, its return has averaged about 12% a year, although it lost money in three of the last six years.
According to Lee-Chin, his purchase of National Commercial Bank fits the same template as his mutual fund investments do. It represents a long-term investment in a region that's poised for a surge of growth, thanks to the aging of North America's population. Rich retirees prefer warm places near water, and the areas that meet these criteria in the United States -- the coasts of Southern California and the Southeast -- are rapidly filling up, he pointed out. The Caribbean region stands to benefit from that saturation. "Why? It's close, and it's friendly. It respects the rule of law. And it's dollar denominated.... So when you think about the economy of the Caribbean, disregard what you see there today and think about the effect of the potential demand of 100 million more people. They will need healthcare, telecommunications, financial services and entertainment."
For Lee-Chin, the dividends from his investment in National Commercial Bank have been more than financial. He says the experience has reminded him of an allegory about three bricklayers. The three men are working on a snowy day, and someone happens along and asks them, "What are you doing out on a day like this?" The first responds, "I need the money." The second says, "I'm a professional, and this is my job." And the third says, "I'm a religious man, and we are building a cathedral."