O'Leary "Global" Equity fund loads up on old Canadian favourites

I must be asleep at the switch, as I’ve only now become aware that Terence Kevin O’Leary, Canada’s highest profile fund manager, has posted the Sept. 30th holdings of his newish O’Leary Global Equity Income Fund (OGE-UN:TSX) portfolio on his website. We now have a sense of what makes his investment juices flow, and some of the names are remarkably familiar.

As some of you know, I’ve been “from Missouri” on this Rock Star Investor concept since the launch of OGE last summer (see prior post “O’Leary Fund promises to share the wealth and wisdom” May 8-08), and threw together a Decade of Daddy Mirror Fund on Canada Day 2008 to see how hard it would be to beat OGE’s stock-picking and dividend income generation performance (see prior posts “Decade of Daddy Mirror Fund” July 2-08 and “Decade of Daddy Mirror Fund™ Bi-weekly Report” January 25-09). Early days, but OGE’s performance is lagging both our Mirror Fund and the Dow Jones 30.

As you may also recall, one of Mr. O’Leary’s key value propositions was global diversification — a key to wealth creation. That his international travels put him in touch with investment opportunities that average Canadians didn’t have access to, and that OGE would invest up to 20% of its assets in highly attractive private deals and alternative investing strategies (“private equity, leveraged buyout equity participation, mezzanine debt, distressed debt and venture capital”) in an effort to enhance returns…another tool generally unavailable to Joe and Jill Retail. A lot of brokers and their clients bought the proposition.

The OGE Final Prospectus stated that “The Fund has been created to invest primarily in global income-generating equity securities.” It went on:

“The Portfolio Manager and O’Leary believe that global investment opportunities provide investors with an important source of investment diversification, income and appreciation. Globally, there are over 6100 issuers with a market capitalization of over $1 billion, across a wide range of industry sectors. However, in Canada there are fewer than 220 such issuers and they are concentrated in the financial and resource sectors making it difficult for investors to achieve true diversification in their portfolios. The Portfolio Manager and O’Leary believe in a value investing approach to investing globally and believe that global markets for dividend-paying equities are currently very attractive.”

The May 30, 2008 prospectus promised the follow initial allocations:

– 60% common equity, 40% preferred equity
– 35% Canada/USA, 35% Western Europe, 15% Asia and 15% ROW
– key investment sectors: 16% in Communications, 15% in Consumer, non-cyclicals, 11% in Utilities and Real Estate….

Now that the portfolio is public, we can see if they’ve lived up to their initial promises. Here are the top 10 holdings:

1. CASH and EQUIVALENTS 37.8%
2. FORDING CANADIAN COAL TRUST 3.5%
3. BCE INC 3.5%
4. TERANET INCOME FUND 2.2%
5. TELUS CORP 2.0%
6. TRANSALTA CORP 1.9%
7. CANADIAN OIL SANDS TRUST 1.8%
8. UNITED GROUP LTD 1.7%
9. TELECOMUNICACOES DE S.P.-ADR 1.7%
10. FRANCE TELECOM SA-SPONS ADR 1.6%

Take a moment for yourself, as Happy Feet’s Ramone would say. The six top stock positions are Canadian-based securities. Not to put too fine a point on it, but weren’t we promised “that global investment opportunities provide investors with an important source of investment diversification, income and appreciation”? Canada represents just 3% of the world’s stock market capitalization. The USA’s GDP is 11x our own, yet none of the ten largest holdings comes from the world’s largest stock market. U.S. recession perhaps? Is Canada not in the same economic ecosystem?

To make things ever more bizzare, three of Mr. O’Leary’s six largest stock positions as at 9/30/08 are some of the very names we held in the Decade of Daddy Mirror Fund™: BCE, Teranet and CDN Oil Sands Trust. And our Mirror fund was just a lark. These guys are charging investors $800k a year to pick some of the same stocks in our own investing backyard.

In terms of how closely Mr. O’Leary stuck to the promises of the prospectus, one key area of comparison is how the allocations size up against the promises of June? CDN/USA securities were to be 35% of the portfolio, but it was sitting at 42.6% as of September; 69% if you back out the cash. Western Europe is now called “Europe”, and that promised 35% allocation comes in at just 8% (13% sans cash component) as of September.

The only other thing to note is the strange statement that “there were no short positions as at quarter end.” That’s a relief. How does a fund that is structured to produce income (“Get Paid While You Wait”) justify going short on stocks, prefs or bonds?

I’m sure investors are looking forward to seeing what nuggets will turn up when the 4th quarter’s portfolio holdings are released. Lots of churn, or little? Will KO have stuck with his $436,123 of Citibank shares (C:NYSE) that have declined ~82% in value since the September 30th? Now that Citibank’s dividend is a penny, the phrase “Getting Paid While You Wait” isn’t the first thing that comes to mind on that pick.

Time will tell if being a talented television personality gives you the tools to be a stock-picker who can consistently outperform the indicies.

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