Portfolio churn an early hallmark of O'Leary's Global Equity Income Fund

O’Leary Facts & Figures Week Part Three

There are various schools of thought about active investing. Do you buy good companies and hold their shares for a long time, or do you move about the market, looking for the trends to jump into as long as that’s a profitable exercise?

Buy & hold? Or buy, sell, buy, sell, buy, sell, buy, sell, buy, sell, buy…?

Warren Buffett built his bountiful nest egg on the basis that buying more of what you already own and like was always the preferred course of action; there was no such thing as a “flavour of the month” in his portfolio. That’s not to say you don’t trade out of situations when the original investing rationale changes; or take profits when warranted. But trading for trading’s sake isn’t a proven money maker.

If it were the case, hedge funds, being the most active traders in the investing universe, would never have a down year.

Given Mr. Buffett’s acknowledged success as a global equity investor, it struck me as curious to see that CBC Dragon Kevin O’Leary would be so quick to dump most of the large stock positions in the O’Leary Global Equity Income Fund (OGE.UN:TSX) during the fourth quarter of 2008. Stocks he had just bought for his new fund a few short weeks earlier.

In fact, the vast majority of the top 25 holdings of the O’Leary Global Equity Fund have been changed out during Q4, according to data just released on his website. 17 of the top 25 holdings as at September 30th were not on the map as of December 31st.

Was it the changes in the macro climate that drove those investment decisions? The 2008 MD&A barely touches on the point.

Could it have been frustration at the 37% drop in the OGE net asset value since he founded the fund last summer? A desire to generate some trade for Mr. Tripp? Currency moves? The surprising 95% correlation between OGE’s NAV and the Dow Jones 30 index? Did better ideas present themselves than at the prior meeting of the investment committee?

Although there are more than 15,000 stocks in North America, Mr. O’Leary held 3 of our very own 14 Mirror Fund holdings as of September 30th. Since then, Teranet was acquired by OMERS, and the positions in BCE and Canadian Oilsands Trust have been dispatched to the rubbish bin by Mr. O’Leary.

Ironically, Mr. O’Leary appears to have replaced those Mirror Fund names with three new ones: Bristol-Myers Squibb (BMY:NYSE) is now his second largest stock position, and he also added Bank of Montreal (BMO:TSX) and JP Morgan (JPM:NYSE) to the OGE Top 25 holdings. We’ve had JPM and BMY since July 2008. We were in and out of BMO once last year, but have held it again since December.

In the space of a few months, Mr. O’Leary has owned almost half of the stocks in our slapdash Mirror Fund. Thanks for the compliment!

It may well be that Mr. O’Leary dumped many of his original holdings in anticipation that there might be criticism that the “O’Leary Global Equity Fund” wasn’t really all that global after all, having invested largely in North American-based companies. Despite the promises of the initial public offering prospectus (see prior post “O’Leary “Global” Equity fund loads up on old Canadian favourites” February 13-09).

Whatever the reason for the failed romance with the original stock picks, huge portfolio churn in a money-losing, index-mimmicking, dividend-paying equity fund will be one of the many questions that investors will have for their stock brokers when the calls go out this week to place units for the newly-launched O’Leary Canadian Income Opportunities Fund.

But, you must give Mr. O’Leary full credit for his spectacular success in raising capital during an extremely difficult time in the capital markets. His demonstrated fundraising success and growing profile as a television personality and regular Globe and Mail Report on Business section columnist must make other Canadian mutual fund money managers green with envy.

If name recognition swamps actual portfolio returns when it comes to raising capital from retail investors, many fund managers will have to reconsider their marketing strategy.

MRM
(disclosure – this post, like all blog posts, is an Opinion Piece)