Portfolio churn continues at O’Leary’s Global Equity Income Fund

Dragon Kevin O’Leary has released the quarterly summary of his O’Leary Global Equity Income Fund (OGE-UN:TSX) portfolio, and the portfolio churn we saw during the December quarter has continued unabated (see prior post “Portfolio churn an early hallmark of O’Leary’s Global Equity Income Fund” April 14-09).

With a broad range of 25 top holdings, guess how many of the Top 24 holdings (cash remained #1 of the 25 in both quarters) at December 31, 2008 remained in the Top 24 as of March 31, 2009?

A mighty eight.

It appears as though Mr. O’Leary has found religion and loaded up on preferred shares, with 13 of these latest Top 24 holdings being new pref share positions. One might have thought the concept would have come before the portfolio NAV was already down 38% (since inception), as it was on March 25th; but ’tis better to find religion late than never.

Since Mr. O’Leary’s original investing motto was “Get Paid While You Wait“, prefs always made good sense. Would’ve made more sense to have bought them last summer, rather than names like Citigroup (C:NYSE), for example, which fell 84.9% between the time of OGE’s initial public offering and March 31st, when it left the list of OGE’s Top 25 core holdings. Live and learn is still a credo, even for the biggest gurus in the investment business. Let’s see how long these new names hang around the frenetic OGE traders.

Names that are no longer in the Mr. O’Leary’s Top 25 positions (post December 31st) include:

Bank of Montreal (BMO:TSX)
Bristol Myers Squibb (BMY:NYSE)
Citigroup (C:NYSE)
JP Morgan (JPM:NYSE)

How did they shares perform this year so far, once they were out of Mr. O’Leary’s Top 25 holdings?

BMO – up 33.7% year to date
BMY – down 12% year to date
C – down 45.8% year to date
JPM – up 18.2% year to date

We held each of BMO, BMY and JPM throughout, and BMY’s dividend is still over 6%; but never bought C. I hate to ask, but do you think KO sold these names once he figured out that we’d owned them in the Decade of Daddy Mirror Fund™ first? (see prior post “O’Leary ‘Global’ Equity fund loads up on old Canadian favourites” February 13-09).

He also appears to have responded to the February criticism (see prior post “O’Leary ‘Global’ Equity fund loads up on old Canadian favourites” February 13-09) that he’d made six Canadian faves his six largest stock positions as of the September 2008 quarterly statement; despite being a “Global” Equity Fund. According to the March 2009 report, only two Canadan names show up in the list of his Top 25 holdings. That’s a dramatic swing back to the promised fund mandate, even if it generated unnecessary trading costs and (potentially) missed dividend payments.

From a cash management standpoint, KO doesn’t appear to have changed his tune. Still lots left to deploy, even as the fund comes up on its 1st anniversary. As at December 31st, cash represented 23.6% of the fund’s assets. It rose to 24.2% as at March 31st, although in true dollar terms cash was down about $600k during the quarter, likely to pay fees, expenses and the monthly distributions of a nickel per Unit.

With the ongoing churn in the portfolio, it is interesting to see what is making (or not) the cut:

• Telecom was cut from a 18% weighting to 9%.
• Prefs grew to 36.6% from 12.5%.
• Utilities dropped from 13.7% to 8%.
• Energy fell from 9.7% to just 3.8%.

Geographically, KO’s as concentrated in North America as ever:

• 55.4% of investments are in North America, even though the website says it’ll be just 35%. If you back out the uninvested cash, KO has a full 73% of his fund invested in North American securities — more than twice what the prospectus called for.

Mr. O’Leary is nothing if not active as a manager. But who knew the outcome would be a “Global Equity Income Fund” that is 73% invested in North America and churns such that it has held just five of the same stocks in its Top 25 over the past two quarters?

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