High MER a surprise at O'Leary's OGE Fund

O’Leary Facts & Figures Week Part Four

During an interview with BNN Host Amanda Lang last summer (see prior post “O’Leary talks up his own book” July 31-08), CBC Dragon Kevin O’Leary was pleased to advise his television audience that he “hated paying fees” and he took umbrage when his long-suffering co-host Ms. Lang playfully suggested that the management fees at the O’Leary Global Equity Income Fund (OGE.UN:TSE) might be “relatively high”; Mr. O’Leary would truck none of that nonsense: “this is one of the lowest cost products”, KO retorted at the time (see prior post “O’Leary talks up his own book part 2” August 5-08).

As we previously highlighted, although Mr. O’Leary talked about a management expense ratio of 1.5% per year on the assets of the fund, there was also the 0.4% “servicing fee” plus the costs of running the fund itself, such as trading, audit public filings and so forth. I made the point last year (see prior post “O’Leary Fund promises to share the wealth and wisdom” May 8-08) that one of the problems with OGE’s investing mandate was that ultra high returns would be required for a retail investor to come out flat (on a net basis) as compared to certain other types of investing products, once you considered the all of the costs of running Mr. O’Leary’s fund.

Based upon Mr. O’Leary’s BNN interview, you’d have thought I pulled my analysis out of thin air. Who better to know what his fund will cost than the man whose running it, right?

With the release of OGE’s annual financial statements, let’s have a look to see how those costs tallied up versus Mr. O’Leary’s public pronouncements:

– Management expense ratio: 7.13%

– Management expense ratio excluding IPO expense: 3.52%

– Portfolio turnover rate: 253.95%

– Trading expense ratio: 0.69%

As the fund launched its IPO last summer, one should not be surprised at the higher than anticipated total management expense ratio (MER). But the MER excluding IPO expenses, at 3.52%, is a far cry from the “low” 1.5% level that Mr. O’Leary promised last summer.

A portfolio turnover rate of 253% means that in any given year, Mr. O’Leary changes his entire OGE stock portfolio 2.5 times. Better ideas came to the fore, I guess.

Although frenetic trading behaviour increases overall fund costs and might be a drag on performance and the resulting net asset value, even that doesn’t completely explain why the MER came in at more than twice what was disclosed in the IPO Greensheet.

Perhaps the old saying about “you get what you pay for” can be applied here. If you want a very talented television personality as your money manager, you’ll have to pay a premium for it.

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