2013 Federal budget hits 33% of Kevin O'Leary's Assets Under Management

The hits just keep on coming.

From the beautiful and historic Rotunda in the Centre Block of the House of Commons following last month’s budget, I told Randy Cass and Catherine Murray, of BNN’s Market Sense, that the budget contained some, “good, bad and ugly” news for Bay Street. The “ugly” part was the government’s decision to bring an end to “character conversion” transactions. As in, if you were supposed to receive interest income from a Fund, and someone used some fancy tax work to deliver you capital gains tax treatment on that forecast interest income, those days were coming to an end once the existing “forward” on your underlying money expired. There would be no more “free money”, as one investor put it to me.

Little did I know at the time how ugly Finance Minister Jim Flaherty’s decision would be for one fund manager in particular.

On March 26th, Kevin O’Leary released information regarding the timing of the forwards that he had in place on five of his seventeen remaining funds:

Yield Advantaged Convertible Debenture Fund – February 28, 2014
O’Leary US Strategic Yield Advantaged Fund – May 19, 2016
Floating Rate Income Fund – July 19, 2016
O’Leary Strategic Yield Advantaged Class – December 29, 2014
O’Leary Global Bond Yield Advantaged Fund – June 23, 2015

These five funds represent 33% of O’Leary’s entire assets under management. Many are in good shape timewise, relatively speaking, but two funds in particular will see their existing forward agreements come due next year. According to his last monthly statements (Feb. 2013), the Yield Advantaged Convertible Debenture Fund has the distinction of being one of his two largest funds still under management, and when combined with the $10.8 million O’Leary Strategic Yield Advantaged Class fund, we’re talking $128.7 million in investor assets losing their beneficial tax shield next year.

When investors are sold things called “Yield Advantaged”, I guess Revenue Canada decided that folks shouldn’t have an advantage, after all.

This will have come at a particularly bad time for the Yield Advantaged Convertible Debenture Fund’s investors, who bought $191.22 million of units just two years ago. The fund reported $117.9 million in AUM at the end of February, which means that 38% of the money raised via the 2011 IPO is already gone, via IPO costs to the investment banking syndicate, Mr. O’Leary’s fees and expenses, distributions to unit holders and investor redemptions. As well as some lousy bond choices one can only assume. The Yield Advantaged Convertible Debenture Fund is down 10% all-in from the $12 IPO price (current NAV $9.04 plus $1.75 of distributions) (see prior post “Shed a tear for O’Leary’s Yield Advantaged Convertible Debenture IPO investors” Mar. 24-13).

Of the $956 million of investor assets still within the entire O’Leary Funds shop as of the end of February, which fell just $5 million in AUM during the month (see prior post “O’Leary Funds appear to shed another 20% of assets in 2012” Jan. 27-13), this first $128.7 million represents just 13% of O’Leary AUM. But another $186 million is also going to be hit eventually, once the budget implementation laws are passed.

What will Investment Advisors tell their clients to do with their money, once the highly attractive tax benefit is gone, if any of the five funds are still under their respective IPO prices at that point? Will Mr. O’Leary be able to come up with new investment products, such as ETFs, to keep his firm trucking along?

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