One on one with Michael Lee-Chin

One of the first things you notice when meeting billionaire entrepreneur Michael Lee-Chin is his commitment to punctuality. And that, it must be said, has nothing to do with the fact that he often helicopters to work.

Both time and speed are of the essence when he conducts business. And the three-year hiatus after he sold AIC, the mutual fund powerhouse he built, to Manulife Financial Corp., has done little to curb his drive.

He’s unfazed by the fact that he’s re-entering the fund business when the industry’s in the doldrums. But that’s not to say his suite of public and private funds, planned to launch in October, hasn’t taken into account the current climate of low returns and high volatility.

“Our mutual fund offerings will embrace the opportunities the current climate provides to invest in growing, high-quality businesses at attractive prices,” says Lee-Chin, chairman of Portland Holdings, a Burlington, Ont.-based investment firm that manages public and private equity.

“In such markets, pricing is more likely to be inefficient, especially in private markets where information is not readily available and liquidity is limited.”

Read: Help clients get into private equity

3 things needed to live a fulfilled life:

• Build the best reputation possible and do everything to burnish it and nothing to tarnish it.

• Differentiate yourself within markets.

• Ask yourself, “Are you doing the best job possible for your family, your clients, and your country?”

The firm’s alternative offerings will be available to accredited investors with a minimum investment of $5,000, and it’s also creating mutual funds with minimum investments of $250.

The MERs are expected to be “competitive within the industry.” (Portland will be operating an IIROC and MFDA dealership.)

Lee-Chin’s new venture aims to bring institutional-style investing mandates and strategies to individual retail investors. Both people and institutions need three things: capital preservation, income generation, and future income growth.

“If the needs of individuals and institutions are the same, shouldn’t the portfolio asset mix be the same?” says Lee-Chin, whose AIC amassed over $15 billion in AUM at its peak.

“We’re doing a private equity fund [where] retail investors will be invested right beside these eminent institutions.”

4 things clients want managers TO do for them:

• Protect their capital

• Give them growth

• Give them some income

• Minimize their taxes

While the funds, particularly their alternative investments bases, will mostly be concentrated in North America, Lee-Chin concedes there’s quality beyond our borders. His own business portfolio comprises assets in the Caribbean, Turkey, India, and Latin America.

Read: Diversify emerging-market exposure

“We will continue, especially with our mutual fund offerings, to explore opportunities and asset classes across the rest of the world.” These areas include the Europe, Australasia and Far East (EAFE) region, as well as emerging opportunities in Brazil, Colombia and India.

Private equity for the masses

Investing directly in private markets, based on intelligence acquired through site visits, enables the fund to offer higher-yielding assets to investors who were previously excluded from such opportunities.

And therein lies his investment philosophy: access to private equity for all. “[I want to] democratize what has hitherto been the purview of the super wealthy individuals and institutions,” he says. “Just like the mutual fund was a way of democratizing stocks. We’re not necessarily only going to be giving clients in-house expertise, but [also] access to the best private equity funds in the world.”

He asserts this isn’t happening now because the current system of equities trading makes its profits from taking companies public “and then building an ecosystem of trading around that.”

Advisors, by extension, are a subset of that system and have a vested interest in selling funds comprised largely, if not entirely, of public companies.

The other flaw is excessive diversification at the expense of quality. “Wealth is created in the real world by owning a few high-quality businesses,” Lee-Chin says. “Name one wealthy person in the world who has created wealth by owning 80 businesses.”

He points out the vast majority of successful businesspeople share four common traits:

• They own a few high-quality businesses;
• They understand those businesses;
• They ensure those businesses are in strong, long-term-growth industries;
• They prudently use other people’s money to create wealth; and
• They hold those businesses for the long term.

5 steps to wealth creation

• Own a few high-quality businesses

• Make sure you really understand those businesses

• Make sure those businesses are in strong, long-term growth industries

• Use other people’s money to create wealth

• Hold those few businesses for the long run

The high volume of stocks held in mutual funds means the managers own too many businesses, some of which will inevitably be in sub-par industries.

Read: Pensions turn to alternatives to boost returns

And then there’s the high portfolio turnover, which causes him to ask, “Name one person in the world who buys and sells his businesses every 14 months?”

Why private businesses?

Lee-Chin’s sold on private businesses because their owners put entire net-worths on the line.

By contrast, “a publicly traded company has independent board members who don’t feel the same [level of] nervousness and anxiety and excitement of having to run a business.” There’s a totally different behavioural pattern when people are playing a high-stakes, all-or-nothing game as they do in private businesses, he adds.

Entrepreneurs are under a lot of pressure to succeed and, therefore, their risk-reward ratios are better aligned. “If it’s a good decision, the owner’s net worth increases. If it’s a bad one, it decreases or he goes bankrupt,” says Lee-Chin.

“On the flip side, the management of a [public] company, if they’re good, get a bonus, and if they’re bad, get half the bonus. If it’s a really bad decision they get a golden parachute. So risk/reward ratio is asymmetrical. You’re rewarded for doing a bad job.”

Private companies, conversely, are run by autocrats who are better at creating wealth. Institutional investment firms know this, which is why private companies dominate their portfolios.

He says entities such as Canada Pension Plan, Yale Endowment Fund and Harvard Endowment Fund meet investors’ need for capital preservation and wealth creation by placing capital with successful, private companies. Individual investors can take a page out of this book.

Read: TIGER 21 portfolios long on private equity

A self-confessed admirer of Warren Buffett’s investment strategy, Lee-Chin has strong preferences and aversions when it comes to business sectors and investment styles. Ultimately, he remains a non-conformist—at a time many money managers are riding the hot-potato market, Lee-Chin won’t bother with anything he can’t buy and hold. “All the wealthiest people in the world are buy-and-hold people,” he says.

He remains sector-agnostic, save that he won’t tap technology with a remote control—products come out too quickly. “We like businesses with a long product lifespan so you can model the cash flow with some accuracy.” Barriers to entry are low, he adds. “You don’t know who in [his or her] basement is coming up with something.”

The world’s his playground

Born in Jamaica, based in Canada, and a global investor, Lee-Chin says the economics of wealth creation are matters of geography.

“In the developing world, underlying growth is stronger, and there’s less competition, regulation, and union interference; so there are high margins,” he says. In the developed world, those conditions are reversed. “[That] means lower margins and more business risk.”

Major population growth in developing countries means increased consumption will be a key driver of growth, and lead to predictable and reliable investment returns. Politics also drives decisions about where to invest.

“If you look at China, would we invest in a jurisdiction wherein ownership and property rights are not strictly defined?” he asks. “Russia; we aren’t going to go there.”

Investors love fixed income

Despite the fact that yields are at record low levels, investors and their advisors continued to embrace fixed-income funds in 2012. The category attracted 91% (worth $15.8 billion) of long-term inflows during the first half of the year.

The category finished as the best-selling major asset category for the 10th consecutive month. What’s more, the category has received more inflows during the first six months of 2012 than in the same period in any other year in Investor Economics’ database (which dates back to 1991).

Read: Vik’s Pick: Tap Canadian junk bonds

The $15.8 billion in inflows easily eclipsed the previous high of $8.7 billion that flowed into fixed-income funds during the first six months of 2010.

Among all mutual funds, inflows in June were not evenly spread among competitors. Of the 99 companies reporting long-term net flows, only 40% managed to generate a positive result—the lowest total since May 2010.

Source: Investor Economics Insight Monthly Update, July 2012

Advice for advisors

In a world where clients are very concerned about capital preservation and shrinking returns, only advisors who have the ability to stand out will remain.

“You’re a commodity, you’re being ETF-ed,” he says. “Your margins are going down [and] you’re undifferentiated.”

Going forward, advisors will have to be more erudite and rise beyond the industry norm. And, Lee-Chin hopes, his offerings will let advisors fill a need for private-sector investments that clients are curious about. “Now advisors can say to their client, why should your portfolio be any different from [that of] Ontario Teachers’ [Pension Plan],” he says.

Pay it forward

Lee-Chin is not all about wealth creation. An impressive record of philanthropy, the most notable of which is a $30-million donation to the Royal Ontario Museum, shows he likes to spread it around, too.

Read: Offer advice on charitable giving

“My being here at this point in time is a culmination of many factors I had nothing to do with,” he says. “On the other hand, there are people who were born in opposite circumstances. This wasn’t their fault. Those of us who have been blessed, have an opportunity to make the lives of those who are less blessed a little more tolerable.”

Everything he does bears a stamp of this worldview. His crusade for democratizing the fund industry is but an extension.

“It takes cash to care,” he quips, sounding as sharp as the blades of his whirlybird that can be seen landing through the furiously juddering floor-to-ceiling glass wall of his office.