Shed a tear for O'Leary's Yield Advantaged Convertible Debenture IPO investors

It has been just over two years since Rock Star fund manager Kevin O’Leary raised $186 million for his Yield Advantaged Convertible Debentures closed-end fund.

At the time, convertibles were seen to be a great way to get some yield at five or six per cent while participating in the upside of REIT, for example. Since retail investors were having a tough time buying REIT convertible product directly, a bunch of funds were raised by a variety of managers to pool retail assets with the view that this was the best way to get fills when Dundee REIT, for example, did a $70 million bought deal for their latest convert. The fact that there was barely any option value in the underlying convert didn’t seem to matter, and some fund managers bought the deals just the same.

Two years have passed, and the O’Leary loyalists that paid $12/unit on this particular IPO can’t be very happy. The O’Leary Yield Advantaged Convertible Debentures Fund Unit NAV is now just $9.1287, and it’s trading at $8.85 on the TSX. Investors have received $1.68 in distributions to date, which, if added to the NAV means they’ve lost 9.9% on their investment after two patient years; they’re down 12.3% if you use the TSX fund quote rather than the posted fund NAV.

O’Leary’s using the BofA/Merrill Lynch Global 300 Convertible Index as his benchmark for this fund. Investors might have been better off just investing in that product during 2012, since it returned a positive 13.4% during the year. Despite raising a fabulous $186 million in February 2011, O’Leary’s Convertible Debenture fund assets have shrunk to $117.9 million as of the end of February 2013.

That’s a 37% drop so far, and the annual redemption window appears to be just around the corner.

When the benchmark index is up 13.4% in a year, and fund investors are down 10% on their original IPO investment in the short space of two, all you can do is shed a tear for O’Leary’s convert investors.

MRM
(disclosure: this post, like all blogs, is an Opinion Piece)