O'Leary: "We have never dipped into the principal"

If only the material would stop, once and for all, so we could just ignore the Rock Star fund managers.

Last Saturday, the Toronto Star did their best to mimic the Globe’s business advertising sections with an “Online Trading” pullout piece. Naturally, they interviewed our man Kevin O’Leary, even though he admitted in the full page interview that he had quit online trading a few years ago. Doesn’t mean that he’s not a great interview, however.

I was struck by the following Q&A with writer Jana Schilder:

How are your yield mutual funds doing?

“We have never missed a dividend distribution, never lowered a target distribution, and never dipped into principal. I’m very proud of the performance we’ve had to date.”

A quick review of the blogosphere would have been in order on that one (see prior post “First year isn’t kind to O’Leary’s investors” July 2-09). Or just a flip through the financial statements of our favourite O’Leary Fund, the Global Equity Income Fund (aka The Decade of Daddy Fund). The financials are easily accessed online, which I assume Jana’s familiar with since the article was about “online investing”.

For the six month period ending June 30, 2010, Mr. O’Leary’s financial statements say the following:

Income: $1.052 million
Expenses: $0.416 million
Net Investment Income: $0.636 million

Net loss on investments: $0.472 million

Increase in net assets from Operations: $0.164 million

Distributions to Unitholders during period: $0.941 million

There must be a CFA out there who can help us with this one. The six months of effort led to a $164k increase in assets, and $941k of distributions were paid out. Where, oh where, did that $777k of additional capital come from to pay the distribution if it DIDN’t come from “Principal”, as Mr. O’Leary claimed in his interview?

For the combined two prior fiscal years ending Dec. 31, 2009, it doesn’t look any different:

Income: $2.908 million
Expenses: $1.461 million
Net Investment Income: $1.446 million

Net loss on investments: $3.238 million

Decrease in net assets from Operations: $1.792 million

Distributions to Unitholders during period: $4.416 million

Almost $4.5 million of distributions were made over the two full fiscal years, despite a susbtantial loss. Where, oh Dragon, did that capital come from if not from dipping into Principal?

Now, many of Mr. O’Leary’s funds are generating income above and beyond the cost to run the fund and pay distributions. Don’t get the idea that everything is underwater, ’cause that’s definitely not the case. But the Decade of Daddy Fund was not the only one dipping into the nest egg, as Anthony Patch was wont to do.

For the O’Leary Hard Asset Fund’s 2010 fiscal year, same again: $500k of investment income, $263k of investment gains, but distibutions of $1.108 million. The incremental cash must have come from capital that was originally invested, right?

At the Founders Series Income and Growth Fund, we can only track up to June 30, 2010, but it appears that revenue was $6.207 million, expenses were $1.407 million, investment loss was $4.872 million, resulting in a loss for the period of $0.074 million. Distributions were $4.664 million during that stretch, and the shareholders’ deficit for this fund was $3.085 million as of the last available financial statements.

We’d be very grateful if a CFA, or an audit partner, could help us out with this analysis; or KO himself: Can you pay more in distributions that you generate from operations and not “dip into Principal”?

We must be missing something.

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