What went wrong with AIC?

There was a time when people couldn’t get enough of the AIC funds. During the late 1990s, the family grew at an astounding rate. In January 1996, the Burlington, Ontario company had only $441 million in assets, ranking it 34th among the members of the Investment Funds Institute of Canada (IFIC). One year later it had grown almost 400 per cent to $2.6 billion and moved up to number 21. By January 1999, AIC had $12.5 billion under management and stood in 10th place in the IFIC hierarchy. The company reached its zenith in December 2001 when assets under management peaked at just under $15 billion.

That’s when the big slide began. In four years, to the end of January 2005, AIC lost $4.3 billion in assets, down almost 30 per cent from the peak. Obviously, the magic had worn off and investors were retreating. What went wrong?

The plain truth is that, for the most part, the AIC funds are no longer delivering the goods. In too many cases, the performance in recent years can only be described as poor to terrible.

Philosophy seems solid
What’s puzzling about this is that the company’s investment philosophy of “Buy, Hold, Prosper” is as bedrock as th come in the financial world. AIC founder Michael Lee-Chin is a disciple of the great Warren Buffett and a firm believer in the virtues of value investing. Most value funds fared reasonably well during the bear market and some, such as Chou RRSP and Mackenzie Cundill Canadian Security, even made money. So it would not be unreasonable to expect the AIC funds to at least hold their ground during the rough markets that prevailed from 2000 to 2002.

After all, Buffett’s Berkshire Hathaway Corp. did just fine during that period and several AIC funds maintain large positions in the company. From the beginning of 2000 to the end of 2002, the A shares of Berkshire rose from US$56,100 to US$72,750 – an increase of almost 30 per cent during the worst bear market since the Second World War.

Sadly, the AIC funds didn’t even come close to that performance. After a strong year in 2000, virtually all the equity and balanced funds lost money in 2001 and 2002 and in some cases the drops were precipitous. AIC World Equity, for example, turned in back-to-back losses of 25.7 per cent and 30.3 per cent in the two-year period. For every dollar an investor held in the fund at the start of 2001, only 52c remained two years later!

It wasn’t an isolated case. AIC Global Diversified Fund suffered losses of 19.6 per cent and 33.4 per cent in the same period. AIC Global Advantage Fund lost 28.5 per cent and 35.9 per cent. The big AIC Advantage funds with $2.7 billion in assets between them suffered only minimal declines in ’01 but both dropped more than 20 per cent in ’02.

Investors sell rather than wait and see
Today’s investors are impatient with failure. They are willing to tolerate indifferent returns over a short period, especially if markets generally are soft. But a growing number refuse to sit still and watch their assets melt away. There are plenty of other places to put their cash.

To its credit, AIC has been trying to right the ship. New managers have been brought in and some of the funds are starting to perk up under their leadership. But too many are still mired in mediocrity.

I recently completed a thorough review of the 18 stand-alone AIC funds with a track record of more than three years for my On-Line Buyer’s Guide to Mutual Funds. Of those, eight received my lowest rating of $ while another seven earned $$. Only three of the 18 funds (17 per cent) were deemed worthy of an above-average $$$ classification. That is not a healthy sign.

Can the company be turned around? Perhaps, but it will take time and there might not be enough of it. Investors will need to see two or three years of superior results from several funds in the group before they start to come back to AIC in a meaningful way. If the company continues to bleed assets while it’s waiting, the owners may decide to see if there are any interested buyers out there before the market value slips much lower. Given the degree of consolidation we’ve seen in the mutual funds industry in recent years, that prospect isn’t so far-fetched.