Kevin O’Leary was hanging out in front of the New York Stock Exchange on a sultry August morning—and people noticed. Then again, it was hard not to notice that his face was featured on a large banner that hung across the colonnaded front of the iconic building with a message from the NYSE Arca exchange welcoming the chairman of O’Shares ETFs on the day he was scheduled to ring the closing bell. The banner was framed on the bottom by three U.S. flags, as the Canadian-born media personality and investor was the star attraction that day at the bastion of American capitalism. 

And on the street below, as the real-life O’Leary stood on a cement bench with the banner as a backdrop during a photo shoot with a professional photographer, numerous passersby who perhaps recognized O’Leary from the Shark Tank television show seized the moment with their smartphone cameras and resembled a pack of paparazzi as they honed their focus on O’Leary. Later that day, some of them likely put those pictures on their Facebook pages … “Hey, look who I photographed today!”

Exchange-traded funds typically aren’t photogenic. Whereas the public personas of industry heavyweights such as BlackRock’s iShares unit, Vanguard, State Street’s SPDR funds and Invesco’s PowerShares division are all about their experience, reputations and financial heft (Vanguard founder John Bogle qualifies as a public face, though he likely wouldn’t attract a crowd on a New York street), O’Shares Investments, which has five ETFs on the market and 17 more in registration with the Securities and Exchange Commission, is built around both the personality and the investment philosophy of Kevin O’Leary. Based on the reaction from the fans in front of the NYSE, people are sold on O’Leary’s public persona. But will his recognizable face—and his investment ideas—be enough to sell his company’s funds to investors?

The 62-year-old O’Leary is a relentless media machine and a self-promoter extraordinaire. He has built his personal brand in two countries through appearances on Shark Tank, CNBC and Good Morning America in the U.S., along with various television shows in Canada. He promotes his own wine on QVC (Vintage Wine Estates in Napa Valley grows his grapes); sells his own photography online (he once aspired to be a professional photographer and remains passionate about the craft); and now is making the rounds talking up his O’Shares ETFs.

O’Shares Investments runs a multi-factor strategy focused on the troika of quality, dividends and low volatility. The five ETFs currently on the market all track a rules-based index and invest in dividend-paying stocks—mainly large caps—in the U.S., Europe and Pacific Asia. That includes two currency-hedged versions of the Europe- and Asia-centric products. The funds have hit on themes that have been popular in the marketplace of late, which helps explain their early success, particularly the O’Shares FTSE US Quality Dividend ETF (OUSA).

OUSA has made a big splash since it launched in July 2015 and has emerged as the company’s flagship fund with assets of $285 million. The main reason for that, as O’Leary likes to point out, is performance. As of late September, the fund’s 11.5% gain since inception beat the S&P 500 by about 9% during that period. The fund has become the O’Shares calling card—so much so that conversations about the company with O’Leary and Connor O’Brien, CEO and president of O’Shares Investments, centered around OUSA almost exclusively. But O’Leary says he’s not worried about OUSA hogging the show from the other four funds, all of which launched in August 2015.

“It’s important when you launch a new platform like O’Shares that you have at least one flagship fund,” O’Leary says. “Why I think it’ll never steal the limelight is that the inherent rules in OUSA are exactly the same factor and rules done in OEUR (O’Shares FTSE Europe Quality Dividend ETF) and OASI (O’Shares FTSE Asia Pacific Quality Dividend ETF).” 

Mother Knows Best

To understand the factors and rules behind the O’Shares ETFs, it helps to know O’Leary’s motivation for creating the products in the first place. His protean career has taken him from television production to software development to asset management, among other things. Software was his big payday—the software company he started in his Toronto basement, SoftKey Software Products, produced educational software. It also made a string of acquisitions to sustain growth. Among them was an education software company called The Learning Company (TLC), which was adopted as the name of O’Leary’s company. TLC was sold to Mattel at an announced price of $3.8 billion in 1999, a deal now infamous as a strategic blunder and financial disaster for Mattel. A shareholder lawsuit involving O’Leary and Mattel executives followed, but the allegations were never proved and Mattel paid an out-of-court settlement. 

Despite the controversy, the TLC deal helped make O’Leary a very wealthy man. And he harked back to his mother for inspiration about how to handle it. 

His mother became an executive at a company called Kiddie Togs, which made children’s winter clothing. And she stressed to O’Leary and his younger brother early on the notion of capital preservation. “She instilled in me to never spend the principal, only the interest and dividends,” he says.

She also instilled a couple of other key lessons. O’Leary was executor of his mother’s estate after she died and discovered she had a separate investment account that was kept hidden from her two husbands. This conservative portfolio of dividend-paying stocks and corporate bonds produced stellar results over several decades. O’Leary’s subsequent research on the investment landscape during the life span of his mother’s portfolio made it clear to him that she was on to something. Namely, that dividends—and not price appreciation—are the secret sauce for a successful portfolio. 

The other key lesson dealt with entitlements, or the lack thereof. “My mother told me there would be no entitlement for me,” O’Leary recalls. “Her old expression was, ‘The dead bird outside of the nest is the one that never learned how to fly.’ It’s such a great analogy.”

In that spirit, O’Leary in 1997 established a family trust that pays his two children from birth to the last day of college, and then they get nothing. The same arrangement applies to any children they have. (His daughter graduated from college and now works at the Huffington Post; his son is a college student studying engineering.)

The trust has specific covenants: It rebalances 50-50 between debt and equity every January 31; it’s not permitted to have more than 5% in any one name and not more than 20% in any sector, but must own every sector in perpetuity; and it must be 100% invested at all times. “And it can’t use leverage, derivatives or funky chicken stuff,” O’Leary says. “It’s really boring.” 

In 2008, O’Leary co-founded a Canadian-based mutual fund company, O’Leary Funds Inc., to help service his family trust. The products hewed to a value-yield investment philosophy. “We had 18 different mandates across equities, fixed income, balanced, international—some of which performed very well and some that didn’t,” O’Leary explains. “Their performance depended on how different markets performed at a given time.”

Increasingly, O’Leary concluded that ETFs were the wave of the future thanks to their low costs, tax efficiency, transparency and liquidity. As such, they would be better investments for his family trust than traditional mutual funds. He charged Connor O’Brien and his investment team with the task of finding ETFs to serve the trust, but they found little that met O’Leary’s criteria because most of the funds were market-cap-weighted, where leading holdings could easily breach the concentration covenant in the trust that limits any name to 5%. 

Meanwhile, O’Leary was increasingly intrigued by the new generation of multi-factor ETF products, and he wanted to create his own multi-factor product based on quality, dividends and low volatility. So he called index provider FTSE Russell and said there must be thousands of investors like him with concentration mandates, so why not join forces to create something to satisfy those mandates?

“Russell said they don’t make new indices for a guy who calls up on the phone,” O’Leary says, adding they told him, “‘I don’t care if you’re on Shark Tank, that’s irrelevant.’

“They [FTSE] had just merged with Russell [Investments] in Seattle and were headquartering stateside in New York, and I said, ‘Guys, let me come over with my team and pitch you,’” he continues. “‘And I’m happy to pay for these indices if I can use them. If you hear what I want, and I’m just an ordinary investor, why wouldn’t there be thousands of other investors just like me?’”

O’Leary gave them a shopping list of the things he wanted and, equally important, didn’t want in the index. Any holdings that max out over 5% need to be trimmed every quarter. There would be no companies using sales accruals (as WorldCom did). There would be no companies using debt to maintain or increase their dividends. And there would be no companies that have a slowdown in asset turnovers or return on assets.

“They were interested, and worked with Connor and the analyst team. It took them about a year, and they came back with OUSA,” O’Leary says.

Balance Sheets

O’Leary Funds was eventually sold to Canoe Financial LP in a deal that closed earlier this year. In its place is O’Shares Investments, which has collaborated with FTSE Russell on its five listed ETFs. 

The OUSA fund, for example, tracks the FTSE US Qual/Vol/Yield Factor 5% Capped Index, which measures the performance of publicly listed large-cap and mid-cap dividend-paying U.S. companies that fit the bill for market capitalization, liquidity, high quality, low volatility and dividend yield.

Its recent top holdings included Johnson & Johnson, Exxon Mobil, Verizon, AT&T and Microsoft, along with about 135 other companies that meet O’Leary’s investment mandates. Its recent distribution yield was 2.24%.

O’Leary is proud that OUSA so far has topped the S&P 500 in both performance and dividend yield (the S&P 500 recently yielded about 2.1%). Of course, the dividend play has become a crowded trade in the current yield-starved environment, inflating many dividend payers—even those traditionally considered more stodgy than sexy—with unusually high valuations. 

“People ask me whether the dividend play is over,” O’Leary says. “I reply that O’Shares has nothing to do with being a dividend play. It’s really about balance sheets. So these identical mandates [for all five O’Shares ETFs] look at all of the sectors and mine for the best balance sheets. One of the symptoms of a great balance sheet is low volatility and a higher dividend yield.

“People ask me if I think the fund will continue to outperform? Absolutely. When does a good balance sheet fall out of favor?” he asks, before answering his question in a trailing whisper: “Never.” 

Todd Rosenbluth, director of ETF and mutual fund research at CFRA, believes that OUSA can withstand a downturn better than it could a raging bull market. 

“As we’re at the end of a long bull market, it’s unlikely we’ll see the market race ahead,” Rosenbluth says. “So high-quality, low-volatility, dividend-paying companies should do very well in a down market and flat to modestly well in an increasing market. Where they [OUSA] might come up short versus a market-cap-weighted approach is in a more aggressive bull market, where they’ll lag on the upside.” 

Connor O’Brien doesn’t disagree with that assessment. “I think we would lag in a raging bull market where risky stocks do well,” he says.

O’Brien notes that OUSA doesn’t own any of the big banks because of their challenging business models—they’re under pressure from regulators, their return on assets is low and their leverage remains high. “These companies score low on a quality metric scale,” he says. “So when banks have one of the periodic bounce backs we’ve seen during the past five years, market-cap-weighted funds will do a little better than us due to their exposure to big banks.”

O’Brien adds that since it was launched, OUSA has captured 90% of the upside in up markets and less than 50% of the downside in down markets. “That’s pretty good—it’s winning by losing less, and it’s a result of these quality metrics,” he says.

Active Index

On August 30, O’Shares sent out a press release celebrating the one-year anniversary of the launch of the O’Shares ETFs and boasting that all five funds “have outperformed their relevant benchmark, providing greater total return, more yield and generally lower volatility in their first year.” The outperformance ranged from nearly 11% by OUSA versus the S&P 500 to 4.5% by the O’Shares FTSE Europe Quality Dividend ETF versus the STOXX EUROPE 600 USD Total Return Index. 

OUSA’s asset base of $285 million dwarfs its four siblings, where assets under management range from roughly $38 million for the FTSE Europe Quality Dividend ETF to just about $4 million for the FTSE Asia Pacific Quality Dividend Hedged ETF (OAPH). 

Net expense ratios on the funds are 0.48% for OUSA, 0.58% for both the O’Shares FTSE Europe Quality Dividend ETF and the O’Shares FTSE Asia Pacific Quality Dividend ETF, and 0.68% (1.27% gross) for the O’Shares FTSE Europe Quality Dividend Hedged ETF (OEUH) and the O’Shares FTSE Asia Pacific Quality Dividend Hedged ETF. 

Some investors might consider those fees to be steep for index funds. O’Leary takes issue with that. 

“We’re not an index in that sense,” he says. “We’re an actively managed rules-based product. I haven’t heard anyone complain to me this year about fees with OUSA; they want to talk about performance. At the end of the day it’s the focus on performance—not fees—that matters, and 48 bips is in the middle of the range of the other products in the market.”

When it comes to eating his own cooking, O’Leary says all five O’Shares ETFs increasingly make up a bigger share of the equity allocations in both his family trust and personal investments, as he slowly unwinds existing holdings in hedge funds, private equity and alternative asset classes. He notes that he works with many asset managers on the fixed-income side of those accounts, including mutual funds.

“Mutual funds and ETFs are different things, and they both have their merits,” he says.

High Expectations

O’Leary says when the O’Shares ETFs launched last summer, the original constituents were retail investors because they learned about the product from O’Leary on television and via social media. Later, he notes, O’Shares started getting calls from institutional investors who wanted to know more about the funds and how they’re structured. 

One of those was Beaumont Capital Management, which builds tactical ETF strategies for private and institutional clients. David Haviland, managing partner and portfolio manager at Beaumont, first became aware of O’Shares when three of his analysts who vet ETFs approached him independently with the same message—“We need to look at these funds.” At the time, he says, he didn’t know who Kevin O’Leary was.

“They said they were O’Shares funds from Kevin O’Leary, and I said, ‘Who the hell is Kevin O’Leary?’” Haviland recalls.

Today, Beaumont employs the OUSA, OEUR and OEUH funds in its portfolios. “This wasn’t star struck and fame-induced,” Haviland says. “This was induced because of the construct of their ETFs. The bottom line is we like what they do and how they do it.”

O’Leary claims O’Shares increasingly has been on the radar of young investors. “It has become a favorite of millennials who want to invest a few hundred dollars a week. That’s probably because I’m talking a lot on television and radio speaking about the merits of ETF investing—not just O’Shares, but the whole platform, particularly multi-factor or smart beta or whatever you want to call it. That was something we didn’t think about when we started the platform, but it’s a growing constituency. I really believe that this entire generation will be a power driver for the entire ETF platform.”

And O’Leary has no doubt that his company’s ETFs will be coming soon to an advisor-related investment platform near you. “I anticipate being on all of them,” he says, adding that O’Shares now has a track record—albeit, only a little more than a year—of performance to bring to the table, and that O’Shares has been having talks with various platforms. 

If anything, Kevin O’Leary is not boring. He’s a whirlwind of words and action who can just as easily riff on the ins and outs of investing in Fender guitars as he can on the merits of multi-factor ETF investing. His other financial company, O’Leary Financial Group, is the umbrella entity for his investments in start-up companies, his financial literacy outreach through books and public speaking, and an outlet for sales of his wine and photography. Lately, he’s been making noise about running for the leadership of Canada’s Conservative Party. 

“I’m a big investor in the Canadian market, and I’m very frustrated with the performance of the politicians at the provincial and federal levels. So I’ve become an activist,” says O’Leary, a Canadian citizen who has made the Back Bay neighborhood of Boston his family’s primary residence since 1994. He’s been there so long that the Boston Bruins have become his favorite hockey team.

Looking ahead, O’Leary is excited about the 17 O’Shares ETFs that were filed with the SEC in July. Those funds range from different flavors of both domestic and international equities to a variety of fixed-income products including senior loans, high-yield corporates, investment-grade corporates and an aggregate bond fund. They all incorporate the word “quality” in their names, and all of the equity funds have a dividend focus.

He can’t talk about them publicly for regulatory reasons, making this a rare occasion when his lips are sealed. But he can talk about what he sees for O’Shares Investments down the road. “I think O’Shares will grow to $10 billion over the next few years,” he proclaims. “I love to be competitive and like to be an innovator.”

No doubt few if any new ETF entrants—particular among smaller players—have had such a powerful marketing bullhorn in hand as the ubiquitous Kevin O’Leary and his well-known personal brand. But personality can go only so far. Time will tell whether the fast start for O’Shares is just a matter of it being in the right market conditions at the right time, or whether its funds can perform in all types of markets. If they can’t, then investors are liable to throw them to the sharks.