O’Leary talks up his own book part 2

Given all of the buzz and comments generated by Kevin O’Leary’s appearance on BNN TV last Wednesday (see prior post “O’Leary talks up his own book” July 31-08), it stands to reason that investors would want to know more about the O’Leary Global Equity Income Fund (OGE-UN:TSX). If you watch the TV clip on BNN Television there are definitely some things you’ll learn about the man and the mind:

– Kevin O’Leary “doesn’t like to pay fees” to money managers

– KO “chose this manager” (Stanton Asset Management) because, in part, they are fantastic at dealing with foreign currency risk when buying foreign equities

– the Decade of Daddy Fund™ (aka OGE-UN:TSX) has what KO says is a “low” annual management fee of 1.5% (no mention was made on the show segment of the additional 0.4% of annual servicing fees, which puts the total fee at 1.9%, not 1.5% {see prior post “O’Leary Fund promises to share the wealth and wisdom” May 8-08} or the fact that the Fund also pays the normal expenses of running the business, such as mailing, audit, legals, etc. – all above and beyond the 1.9% of management and servicing fees)

– when co-host Amanda Lang came back to the fee topic, she suggested that the O’Leary Global Equity Income Fund’s management fees were “relatively high”, but Mr. O’Leary would truck none of that nonsense: “this is one of the lowest cost products”, KO retorted

– and then when Ms. Lang set up KO with the line “now, you’re not a financial advisor, you’re not a money manager, you’re just an investor”, Mr. O’Leary replied: “I’m just an investor like you and me”. (Ever since the Costello OSC case, people take appropriate steps to make it clear to investors whether or not someone is licenced to give securities advice. We do it too.)

– Ms. Lang also asked the natural question: how is the fund doing in the first month since it was launched? Mr. O’Leary replied “it’s up”. The NAV reported for the Fund as at August 1, 2008 was $11.1846, as compared to a $12.00 IPO price per unit. $0.63 of agents’ commission per Unit accounts for the lion’s share of the drop from $12.00; viewers didn’t hear what price point KO was using to determine whether or not the Fund “is up”.

There’s plenty to chew on over the course of the 20 minute segment, but let’s just look at the key highlight.

Surviving this far in life based on doing my own due diligence, I pulled down the IPO prospectus for the Fund yet again. And there it is, right before my very eyes, the paragraph excerpted below. By the looks of it, Mr. O’Leary is much more that “just” an investor. He’s actually a part owner of Gencap (Manager of the Fund) and a paid consultant to the Fund:

“Gencap Funds LP will act as trustee, manager and promoter of the Fund and will provide all administrative services required by the Fund (the Fund being the O’Leary Global Equity Income Fund). The Manager is a limited partnership and is indirectly owned by Mr. Kevin O’Leary and directly by the Portfolio Manager. Mr. O’Leary is the Chairman of the Manager and of O’Leary. References herein to the “Manager” are to Gencap Funds LP, together, as applicable, with its general partner, Gencap Funds Inc.

The Manager has retained Stanton Asset Management Inc. to provide investment advisory services to the Fund. Stanton is a Canadian investment firm focused on global investment opportunities, and is also the manager of a variety of specialized funds. Stanton was formed in 2004 and the portfolio managers at Stanton have assets under management of approximately $100 million. The Portfolio Manager has engaged O’Leary to provide consulting services to the Portfolio Manager. The Portfolio Manager, together with O’Leary, will implement the investment
strategy of the Fund. O’Leary will identify markets, market segments and investment opportunities but will not recommend the purchase or sale of specific securities by the Fund. The Portfolio Manager is ultimately responsible for the investment decisions of the Fund and will review opportunities identified by O’Leary and make the investment decisions on behalf of the Fund.”

The prospectus makes it pretty clear that Mr. O’Leary is a part owner of the Manager (Gencap Funds), is the Chairman of Gencap, and is a paid consultant to the Fund. None of this was disclosed on the BNN broadcast from what I saw, and that appears to fail the current norms of “full disclosure” in the business media world.

When an analyst or Portfolio Manager talks about particular stocks on a CNBC or BNN television show, the holdings of themselves, their firm / family and their economic interest in the stock in question are disclosed in a handy box for all to see (or discussed verbally). If they own the name, or have i-banking relationships with the company in question, that information is put out there simultaneously on the broadcast.

The theory is simple. Investors need to know this information so that they can determine what, if any, bearing that personal analyst stake might have when considering investing as recommended by the analyst in question. If the research analyst’s firm has an investment banking relationship (ie. fee revenue is generated that indirectly goes to the research team via the bonus pool) with the stock that is a “Strong Buy”, that might be worthy of cogitating, as well.

For reasons that aren’t clear to me, Mr. O’Leary advised viewers that he was “just an investor” in the Fund (about 31:50 into the broadcast clip), “just like you and me”.

Odd messaging aside (how can he be “an investor” like “you and me” when he’s speaking in the first person, referring to himself?), there’s far more to his relationship with the O’Leary Global Equity Income Fund, of course, than merely being “an investor”.

To be fair to KO, he might assume that all BNN viewers and potential future shareholders will read the prospectus prior to buying the Fund over the TSX, but now that the Units are trading and the Fund is out of distribution, the disclosure world changes immediately. No longer can a Promoter use the warmth of the protective shield that the IPO prospectus represents.

Each and every appearance where the Fund is discussed falls into the nether world of Fair Disclosure. In the case of television broadcasts, any portfolio manager or research analyst is obliged to disclose his/her personal stake in the stock in question. And “stake” certainly includes working part-time for the Company whose stock is being discussed.

BNN made certain that viewers knew about KO’s $2.1 million personal investment in the June 2008 $40 million IPO of OGE-UN:TSX, but there appeared to be no disclosure of Mr. O’Leary’s ownership stake in the management company that you would assume is earning fees from the Fund itself. The reference to Mr. O’Leary hating to pay money manager fees is ironic, assuming that he now appears to benefit from a Fund management fee stream.

Nor did BNN disclose Mr. O’Leary’s “consulting” relationship with the Fund – which one assumes generates compensation for him in exchange for providing investment ideas to the Fund, as disclosed in the prospectus excerpt above. One might even reach the conclusion that with his name on the Fund “front door” itself, BNN determined that such disclosure was unnecessary.

And does anyone really care? Perhaps not. But for all the pain that investment banking research departments have had to go through this decade to make their interests in stocks clear to the investing public, the least the television media can do is consider following the rules they lay out for others.

MRM
(reminder – this blog, as do all, falls into the Opinion Piece category)