First year isn't kind to O'Leary's investors

Decade of Daddy Mirror Fund™ One Year Report

For those who are new to the space, Dragon Kevin O’Leary launched an equity fund a year ago with the promise of unique stock market riches and index-beating private company deal flow (see prior post “O’Leary Fund promises to share the wealth and wisdom” May 8-08). At the time, I thought the concept was unlikely to be a winner for retail investors, and (to put some ego on the line) threw together our own “global equity fund” to see if I could replicate his promised outperformance. Since Mr. O’Leary was living his so-called “Decade of Daddy“, I thought I’d call our notional $40 million fund the “Decade of Daddy Mirror Fund”.

And so it began. His real $40MM fund versus our fake one. We launched on Canada Day 2008, and it is time to take stock at the one year mark. The day of our public embarrasment? Did he blow the doors off our meagre effort? That’ll have to wait, it appears.

Our Decade of Daddy Mirror Fund™ continues to outperform the major indicies. The US$ is down from the March 1.29 exchange rate to 1.16, which cramps performance over the period. But things are still going in the right direction.

All told, our Mirror Fund is up 6.8% to $42.7 million over the past 12 months. Staying above par is important now that we are at our one year anniversary of the $40 million fund’s launch (see launch in post “Decade of Daddy Mirror Fund” July 2-08).

In the Mirror Fund, we’re making money in Bank of Montreal (+63%), Goldman Sachs 2037 Subdebt (+43.6%), JP Morgan (+6.0%), MKS (+11.3%) and Royal Bank (+18.8%) {gain/loss percentages in home currency}.

Since the fund began we’ve locked in our gains on BMO ($775k; but we are back in again), CIBC ($242k), Merrill Lynch ($799k) and Teranet ($307k plus distributions) as you’ve read in prior reports.

In the red column (again in home currency):

BCE (-31%), BNS (-3.4%), Berkshire Hathaway (-34.7%), Bristol Myers (-4.6%), CDN Oil Sands Trust (-46.9%), Duke Energy (-14.7%), Eli Lilly (-19.5%), Merck (-20%), Spectra Energy (-20.7%) and Thomson Reuters (-7.6%).

Over at the O’Leary Global Equity Income Fund (OGE.UN:TSX), Mr. O’Leary has had little success getting the fund’s performance out of the ditch and into first gear. Since the market began its recovery in early March, the S&P 500 is up 35%, the Dow Jones is up 29%, yet the net asset value for OGE is up just 12%.

Fortunately for prospective OGE investors, the trading premium to NAV has been “fixed” and the fund no longer trades on the TSX at a massive premium to the underlying value of the fund’s actual stocks. That never really made sense, but it took a few months for that bubble to burst following Mr. O’Leary stellar fund unit price-boosting performance on his BNN TV show last summer (see prior post “O’Leary talks up his own book” July 31-08).

Since we launched the mirror fund on Canada Day 2008, the Dow Jones Index is down 2,878 points from the level of 11,382 — or 25.3%. The S&P 500 is down 26.8%. Our Decade of Daddy Mirror Fund is up 6.8% during the same timeframe (including dividends and currency moves). With more than half of the portfolio trading in US$, the currency matters.

The unit price of the O’Leary Global Equity Income Fund is down 36% since it was launched, and now sits around $7.50 as compared to the June $12 IPO price. One can’t forget that it has paid out 40 cents in cumulative distributions since launch; bake that into your return and you’re “only” down 32% (unless you reinvested the distribution in more OGE units, since they’ve gone down just about each and every month since the IPO).

With a $8.25 NAV, the decline since the launch date has improved from 37% to 31%. As has been mentioned in the past, OGE’s NAV decline has almost perfectly tracked the S&P 500 (-27%) and the Dow Jones 30 over the same time period (-25%). The correlation between the NAV and the Dow between August 29, 2008 and Tuesday’s close remains high — at 88%. Despite the sale of 17 of the top 25 stocks during the last couple of quarters, the fund’s NAV continues to track one of the world’s best known benchmarks with almost a “mirror-like” perfection.

Mr. O’Leary’s actual OGE investing performance has had no impact on his rock star reputation. Money continues to flow in across his four funds. My math suggests that over the past 12 months, Mr. O’Leary has generated about $19.6 million of IPO commission for Bay Street investment bankers and stock brokers.

Tidy pass that is.

Investing performance? Now that’s not quite as eye-popping. But, hey, at least Bay Street and KO are making money.

So that’s something, right?

MRM
(disclosure – this post, like all blogs, is an Opinion Piece; we own BCE, BMO, BNS, COS, MKX and GS sub debt in our household)