O'Leary ETFs already under-performing

You might be able to hide from your track record, but you can’t hide from incompetence.

Although it was almost nine years ago, it seems like only yesterday that Kevin O’Leary was launching his first Canadian retail fund (see prior post “O’Leary Fund promises to share the wealth and wisdom” May 8-08).  With a couple of seasons of CBC’s Dragons Den under his belt, Mr. O’Leary figured he could convince CBC viewers that he should manage their retirement savings.  His pitch got some traction with stockbrokers, at least until investors started to lose money.

For those of you who didn’t pay much attention at the time, most of Mr. O’Leary’s Canadian structured product funds performed very poorly.  In both absolute and relative terms.  Now that he has 18 months under his belt as a U.S. fund manager, it seems high time to review the performance of Mr. O’Leary’s ETF investment strategies.

Has Mr. O’Leary performed any better for U.S. retail investors?  Does his so-called “SmartBeta” strategy work better than buying a more liquid and established ETF product from, say, Blackrock?

If you missed KO’s tortured experience on the Toronto Stock Exchange, here are a few examples of the pain that Mr. O’Leary caused Canadian investors before he fled to the U.S. market on the back of his perch on ABC’s Shark Tank:

January 2009: Although he marketed his first retail fund as a “Global Equity Income Fund” that would invest 65% of its capital overseas, with 20% in private company investments that he would have special access to given his TV gigs on CBC and the Discovery Channel, KO ‘s six largest holdings were actually publicly-traded Canadian stocks.

April 2009:  During his appearances on BNN, Mr. O’Leary would complain about high (2.5%) mutual fund management fees.  It was unexpected, then, to discover that Mr. O’Leary was spending 3.52% to manage the O’Leary Global Equity Income Fund, for example.  And that didn’t include the costs of the 2008 IPO (another 6% for IPO commission, 3.5% for legals, etc.).

July 2009:  With one year under his belt as a Bay Street money manager, the unit price of Mr. O’Leary’s OGE fund was trading at $7.50 on the TSX — 36% below its $12.00 IPO price (far worse that the TSX index had performed)!

June 2011:  Although Mr. O’Leary told the Toronto Star that he’d “never dipped into principal” to pay retail investors a distribution using their own money, his own OGE fund financial statements showed otherwise.  Later, he claimed that “everyone does it.”

May 2012:  In a year where the Dow Jones Index went up (2011), 24 of Mr. O’Leary’s 25 different funds lost retail investors money.  Massive redemptions followed in 2012 and 2013.

October 2015:  Mr. O’Leary announced that he was exiting the fund business by selling his AUM to another CBC Dragon by the name of Brett Wilson (Wilson’s Canoe Financial had about $3.1B of AUM at the time).  Mr. O’Leary must have come to realize that his Canadian fund management business was never going to recover from the poor performance of so many of his various funds.  Without the support of stock brokers for new funds, Mr. O’Leary’s ever-shrinking pool of assets — by then just C$800M, about half of its estimated peak — would continue to fritter away.  Post script: Canoe now reports AUM of $3.5B, which implies that about 50% of O’Leary’s retail investors may have hit the exits when their annual redemption window opened.

It would be natural to assume that Mr. O’Leary’s often horrid Canadian fund management performance between 2008 and 2014 meant he would be ineligible to raise similar capital in the United States.  You can be forgiven for assuming that American brokers would google him, discover what we already knew to be true (Canadian Business Magazine,  ROB Magazine), and dodge the bullet.

You’d have been wrong.

While America is proudly the land of second chances, one might speculate that U.S. TV viewers  assumed — as their Canadian brethren did before them — KO was being marketed as a business guru because someone at the TV network had done some due diligence and determined it to be true.  Given his mindset that money “is the only thing that matters“, it came as no surprise that Mr. O’Leary pitched ABC on doing their own version of Dragons Den with the intention of monetizing his U.S. network appearances via a reconstituted fund company.

On the wave of the Shark Tank TV exposure, Mr. O’Leary launched his U.S. Exchange Traded Fund (ETF) business.  Although there were already two trillion dollars of U.S. ETFs outstanding before he showed up, I guess Mr. O’Leary figured that his marketing genius would be sufficient to build an ETF empire south of the border.  Ever confident, he even kept the same investment themes and Montreal-based portfolio manager that had failed him in his Canadian fund management foray: focus on “quality” and “dividends.”

For investors, one key difference between the two business ventures was the fee structure.

While KO would have received 1.5% to manage your Canadian structured product or mutual fund (plus expenses to manage the fund and pay brokers an annual trailer fee), he’s only able to finagle between 0.48% and 0.68% per annum in the lower fee ETF world.  In theory, he could make it up in volume given he was selling to a nation with a population that’s 9x larger than Canada’s.

With a new strategy, and a raft of free daily advertising on ABC and CNBC, how has Act II gone for Mr. O’Leary?

On the fundraising front, it has gone very, very poorly to date.

According to a recently televised CNBC slide, Mr. O’Leary has only been able to raise US$330M, although the NYSE shows a modestly higher figure online.  Either way, this is dramatically less that the ~$2 billion or so that Canadian stockbrokers originally raised for him (prior to receiving their 6% commission).  With between US$330 and $400M under management in his funds, as a percentage of the more than US$2.2 billion of U.S. ETFs under management, Mr. O’Leary’s marketshare is de minimis.  Despite being on one U.S. TV outlet or another on a daily basis, and dragging himself to various ETF conferences to market his latest fund products.

In terms of gauging the performance of Mr. O’Leary’s fund strategy, there are five different ETFs to track.  Not all of them have an easy comparable to benchmark against, so I’ve done my best to imagine where your average ABC television viewer could have invested their hard-earned dollars in, had they not trusted KO with their life savings.

To date, each of Mr. O’Leary’s five funds is under-performing the most obvious and established alternative fund choice:

Asia hedged: OAPH (US$2.7M AUM, with 68 bps annual MER)

+3.2% since inception, versus the iShares Asia 50 ETF (US$345M AUM, 50 bps MER) which is +19% over the same timeframe

Asia: OASI (US$10.8M AUM, with 58 bps annual MER)

+12.2% since inception, versus the iShares Asia 50 ETF which is +21% over the same timeframe

Europe: OEUH (US$12.6M AUM, with 68 bps annual MER)

-4.4% since inception, versus iShares Europe ETF (US$2.3B AUM, 60 bps MER) which is -3.6% over the same timeframe

Europe: OEUR (US$34.4M AUM, with 58 bps annual MER)

-7.4% since inception, versus iShares Europe ETF (US$2.3B AUM, 60 bps MER) which is -3.6% over the same timeframe

U.S. large / mid cap: OUSA (US$362.9M AUM, with 48 bps annual MER)

+13.7% since inception, versus the iShares Select Dividend ETF (US$17B AUM, 39 bps MER) which is +19.2% over the same timeframe

U.S. small cap: OUSM (US$21M AUM, with 48 bps annual MER)

this fund has only been in operation for 6 weeks, rendering performance analysis meaningless at this stage

There you have it.  American investors can confirm what Canadian retail already knew.  Mr. O’Leary may have many talents, but money management just isn’t one of them.  Despite claiming to have “eye-popping” returns, KO has a problem.  His Redemption as a fund manager is not at hand.

Having promised investors that his funds “will continue to outperform year in and year out“, how long before a sharp U.S. Class Action lawyer, or the SEC, challenges him over that public statement (KO had this photo taken for his short-lived Redemption TV series)?

In the meantime, American investors have quickly come to find what we in Canada already knew:  Mr. O’Leary may be good at marketing, but investors would be wise to invest their retirement savings elsewhere.

MRM

(disclosure: this post, like all blogs, is an Opinion Piece reflecting a personal view. Use of KO’s own promotion photo isn’t meant to imply any criminal wrongdoing.)