Like the O'Leary Fund? Then you'll love Hal Jackman's!

Given the website traffic generated by the buzz surrounding the “Decade of Daddy” Fund™ (aka the O’Leary Global Equity Income Fund), I thought that I’d bring to light another pair of longstanding, but largely undiscovered, publicly traded closed end investment vehicles: Economic Investment Trust (EVT:TSX) and United Corporations Limited (UNC:TSX). Both are tied to the family of His Honour Hal Jackman, a great Canadian in the truest sense of the phrase. And a very saavy investor indeed.

EVT (net assets of $589 million at last report) and UNC (net assets of $950 million) are far larger than the O’Leary Global Equity Income Fund (OGE.UN:TSX), which has just $40 million of capital to invest following its June 2008 initial public offering. UNC, for example, was founded in 1929 – an interesting year to start an investment vehicle. These funds aren’t structured as Trusts, but from an investment strategy standpoint, they really are trying to get you a similar outcome as that Dragon Kevin O’Leary: capital appreciation plus investment income along the way. Weighted to the capital appreciation side of the equation.

We read that one of the great appeals of the “Decade of Daddy” Fund™ is the ability to invest outside the Canadian market. If you want non-Canadian stock exposure, UNC provides that as well, with less than 36% of its assets in Canadian securities as at March 2008. EVT is more heavily-weighted to Canadian assets, with about 48% invested locally.

Now, the dividend payout profile at UNC isn’t quite the same as that being proposed by OGE, as UNC will pay out about $0.80 in dividends over the course of a year, which represents a skinny 1.3% annual dividend yield. Substantially lower than the 5% annual “distribution” being promised by Mr. O’Leary at OGE (see prior post “O’Leary ditches his ‘Get Paid While You Wait’ investment cliché” June 1-08). Mind you, since OGE is paying investors with the proceeds of their own IPO capital – at least in the early months of the fund’s operation – it’ll be a few quarters before one can assess whether or not that 5% payout is pure profit distribution (generated by dividends and income that result from fund investments) or generated via a partial Return of Capital.

If you hate paying fees, as KO claims he does, then you’ll love Mr. Jackman’s funds. The management expense ratio of EVT for 2007 was 0.35%; for UNC, it will be 0.40% for fiscal 2008. OGE is charging 1.5% to invest the capital, plus 0.40% for “servicing”, plus the costs of the audit, legals and so forth.

The returns at UNC and EVT aren’t shabby, either. Whether you compare them to the key global indicies, or OGE’s promised returns. UNC’s 5 year NAV appreciation return is 10.7%, while EVT generated 14% (assumes the reinvestment of dividends at the month-end net equity value and is net of future income taxes and expenses of the Company.) The S&P 500 returned just 2.7%, and the MSCI World Index was up 6.5%, over the same time period (in C$).

The impact of the differing fees is stark when you compare the MER of 0.4% at UNC versus the 1.9% at OGE. If each fund earned 10% per annum on your $100 over a 5 year period, your UNC investment would be worth $158.10 at the end of the 5 year period, while the OGE stake would have grown to $147.60. Put another way, because of its higher fees, OGE would need to generate a return of 11.5% per annum for 5 straight years just to match the 10% return of UNC’s managers. (This assumes that you didn’t reinvest dividends/distributions in either case. Since OGE’s payout experience is still unkown, we’ll have to wait before adding that element to the notional return profile.)

Another similarity between the funds is the opportunity to invest in the shipping industry. KO said on BNN TV in July that it is one of his favourite investments (see prior post “O’Leary talks up his own book” July 31-08), so you’d have to assume that OGE will be backing up the truck on a global shipper or two. Fortunately, UNC itself owns 362,568 shares of Algoma Central Corporation, which already is up 7.7x in value according to UNC’s June 2008 financial statements.

The icing on the cake, of course, is the intrinsyc value of the portfolio you’d be buying into. A key metric in these types of funds is Net Asset Value, a calculation which is simply the value of the assets divided by the number of shares outstanding.

In the case of UNC, you could buy a share this week for $59.50, which is a discount of 23.7% to the fund’s $77.94 NAV (at last report). At EVT, a share goes for ~$84.00, a discount of 20% to the funds $105.03 NAV. Over at OGE, the excitement about KO’s unique talents is generating a very different trading pattern.

A share of OGE can be acquired for ~$12.66 right now, whereas the NAV was $10.987/share as at August 29, 2008. Simply put, OGE is trading at a 15.2% premium to NAV, versus the 20-24% discount that UNC and EVT are trading at.

In tough markets, you can pay a premium to buy a basket of dividend-producing stocks with a capital appreciation profile. Or, you can invest alongside His Honour and buy a portfolio of global stocks at a nice discount to their intrinsic value.

The choice is yours.

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