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.’