Wealth Management | Diana Britton | Jun 09, 2017
Most Americans know him as the outspoken Mr. Wonderful on ABC’s Shark Tank. But Kevin O’Leary is also making a name for himself in wealth management with his suite of O’Shares ETFs, launched nearly two years ago, and most recently, a new app that allows investors to buy fractional shares in stocks and ETFs.
The app is not a robo advisor by the way, which O’Leary believes won’t make flesh-and-blood advisors obsolete.
“The advisory business is going to be here forever because people need a mirror, a reverse of themselves to force them to diversify,” he recently told WealthManagement.com. “You’ll never be able to robo this.”
What else has the Shark been up to? Along with his many ventures, he’s been busy with his wine business and writing financial literacy books. He recently campaigned to lead Canada’s Conservative Party and dropped out of the race in April.
O’Shares now has nearly $548 million in assets under management across seven products. (There are several more awaiting SEC registration.) Even a couple Sharks have invested in his funds, although O’Leary wouldn’t admit which ones.
Before his presentation at the Inside Smart Beta conference in New York, O’Leary chatted with WealthManagement.com about his own personal financial advisor, the Department of Labor fiduciary rule, his ETF strategies and even politics.
WealthManagement.com: I know you’re an ETF provider, but you’re also an entrepreneur. And those are our readers — retail financial advisors running their own business. What’s your view of the financial advice space?
Kevin O’Leary: The world is going through a lot of changes. First, let’s look at the regulatory environment that affects advisors. This week, DOL rules phase one kicks in. They get more onerous over the next 12 months. One of the reasons that the ETF structure is so appealing in this new environment is it’s totally transparent, totally liquid, very tax-efficient. Fees are basically 50 percent less than mutual funds. If performance is equivalent or better, obviously AUM flows for advisors are going to go into this structure. It becomes a challenge of which ones to use and which ones are appropriate for your clients.
I’m a very conservative investor. I’ve got a bunch of covenants I have to live under in my family trust and I built this ETF platform to accommodate this very conservative preservation mandate I’ve got. I have to generate 5 percent a year in perpetuity. That is not easy today. It’s designed to take care of children from birth to the last day of college and then nothing. It does the same for their children. This is an extremely long-term mandate. I have to put in place a philosophy. I call it an actively managed platform that works long after my passing. That’s what O’Shares are. What I’ve done is crystallized a philosophy in investing with a set of rules that never change — no style drift — that mines for the best balance sheets in the market, not only domestically but in small cap and internationally, and lets me sleep at night.
I own a thousand stocks now through this platform that generate almost 2.4 percent yield. So that’s half my bogey, and I certainly have been getting good capital appreciation with a mandate that’s very conservative in nature. That’s what this is about. I think it fits the mandate that many of the financial advisory base have. When I meet with them, they have clients just like Kevin O’Leary that they’re trying to take care of.
WM: What is your financial advisor like? What do you like (or not like) about the relationship?
KO: I won’t disclose who it is because I promised I wouldn’t, but I actually work with a woman and the majority of what she does for me is fixed income. The equity side of my portfolio is taken care of by O’Shares. I get six different products: I own 40 percent of the portfolio in the O’Shares FTSE U.S. Quality Dividend ETF (OUSA), 20 percent in the O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM) and the other 40 percent is split between Europe and Asia, the O’Shares FTSE Europe Quality Dividend ETF (OEUR) and O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI).
But on the fixed income side, I need an advisor that is a technician in being able to trade credits, bonds, bank loans and also a voice to challenge my assumptions. I’ve been working with her a long time. She’s incredibly smart. She’s very skeptical. I need that because I always have a lot of ideas in fixed income that I want to pursue. She’s Mrs. ‘No.’ I think she’s saved my hiney many times.
People don’t realize the value of an advisor like that is to force diversification on you when you can’t do it yourself. People are weak. I’m weak. I love a bond. I love a credit. I like a bank loan. I want to own it. She beats me back into submission of the realities of the market, the particular attributes of that security. She forces me to think about maintaining a maximum position of 3 to 5 percent in anything with full sectoral and geographic diversification. Is she worth it? Yeah. I pay her a lot. But people don’t understand: The relationship, even if it has tension, between the advisor and the investor is crucial. It always will be. You’ll never be able to robo this. People walk over robos. They just change the metrics. The robo never pushes back.
WM: She’s got you in individual securities?
KO: Yes. Today, our portfolio is BBB and above, go anywhere. That’s as good as it’s going to get right now without taking inordinate risk, but what she does is decide. New paper comes to the market everyday. You have to buy new paper, usually between $3 and $5 million per trade to get any kind of efficiency in fixed income. It’s very important to work with somebody that can amass a trade like that or sell one efficiently.
WM: Does she work at a big wirehouse? Is she independent?
KO: She works at a big wire.
WM: If you were building a financial advisory firm in the U.S. today, what would you do?
What intrigues me the most now, and that’s because my children are of this age, is how am I going to solve for a 22-year-old that has just started working that wants to save 10 percent of their salary? The way we’re structured today in the advisory business, nobody wants an account with $4,000 in it. But that’s the time we need to start teaching those people how to invest because, before you know it, there’s $250,000 in that account and that’s when the advisory base starts to get interested. What I’m working on now is, how can I use ETFs as a platform to start financial literacy at the age of 18?
WM: You’ve launched an app to address that, correct?
KO: BeanStox. It’s an educational platform that allows you to buy fractional shares of any product. If you want to put $5 to work on your phone, you can. But over time, that platform grows. Then, at $250,000 in assets or whatever it is, I want to pass those accounts over to advisors because I’m convinced that no robo can take a person from birth to their last day of life. The advisory business is going to be here forever because people need a mirror, a reverse of themselves to force them to diversify.
WM: What’s your reaction to the DOL fiduciary rule? It went into effect this week.
KO: From this day on, we are going into a world of total transparency on fees. ‘Get over it,’ is what I tell everybody. Let’s move on because now we’re all going to have to sing for our supper and we add tremendous value. We force diversification on investors who can’t do it themselves.
But it’s not getting reversed, I can tell you that. No chance of that.
WM: Why do you say that?
KO: What politician is going to put up their hand and say I want less transparency in the market? Nobody. Not a Republican, not a Democrat, not an Independent. So it’s here to stay. That’s my view.
WM: What would you say is the best financial advice you’ve ever received?
KO: From my mother, Georgette: Never have more than 5 percent in any one stock; never more than 20 percent in any one sector; never own a stock that doesn’t pay a dividend. Boy, did that ever work.
And those are the rules of my ETFs because those rules worked so well over 35 years for me. I never let a stock go past 90 days at over 5 percent. The downside of the strategy is you only capture 90 percent of the upside of the market. But you only capture 45-60 percent of the drawdown. When Disney corrects, as it has this week, I’ve already captured 60 percent of the upside of its journey from $94 two years ago because I kept selling it to the 5 percent limit.
WM: What made you get into the ETF business?
KO: Six years ago, I called the CEO of FTSE and said, “I can’t use any of your products. Take a meeting, listen to what I have to say. There must be thousands of people in my boat.” When I got there, I said, “I have a whole bunch of rules I live by that I’ve been working with for decades. If a company is using sales accruals like WorldCom, I don’t want to own it. That’s a rule. If a company is using debt to maintain or grow a dividend, I don’t want to own it. Companies that are using leverage to maintain dividends, I don’t want to own it. I want a test on assets, a return on assets. If the company is slowing its turnover of assets and an ROA is slowing. I don’t want to own it. I want it to be 20 percent less volatile than the market.” On July 15, 2015, OUSA was born, the first ever with so many rules built into it.
What really is the most interesting attribute about the strategy is, you basically get S&P-like returns with 20 percent less volatility but 40 percent more yield because the companies that are less levered tend to, on a company by company basis, return more capital to shareholders.
WM: And you’ve recently filed to launch some fixed income ETFs. Are you going to put your own portfolio in those funds as well?
KO: What I’m trying to do is crystallize my advisor’s philosophy into an ETF platform because she’s been so successful for so long. I’m not getting rid of her, but I’m going to say, “Look, in the credit market where you’re so spectacular and the rules you apply are very much like the rules I’m putting on my equities, can we work together to create an index that immortalizes you?” After all, she could be run over by a truck, not that I want that to happen. But if I could crystallize those rules, which I’m working on, I could buy credits and have different maturities, different credit qualities, but use the same philosophy. It turns out one of the most important things in fixed income and credit markets is liquidity. You need to test on that. Building an index to test for your liquidity in some ways is a new concept.
WM: Do you use any of your skills from Shark Tank to sell or create ETFs?
KO: I meet thousands of portfolio managers. I’m always saying to them, “I love what I do. I’m an investor above everything. Do you have a better idea than this? Can you show it to me? Can you outperform it? Show me your track record over the last 10 years. Can you beat OUSA?” Not easy to do.
WM: What’s your future in politics? Any plans?
KO: Having done it for six months and spent millions of dollars doing it, I will say one thing that most people don’t realize. I don’t care whether you’re running for the presidency or you’re a senator or a governor, nobody can know how hard it is to campaign. You get up at 4:30 a.m. and you work until midnight. You do it six days a week. In some days, I hit six cities in one day. It’s a form of sleep deprivation and exhaustion like I’ve never seen.
I always put politicians down as single cell amoeba, below lawyers. That’s not how I feel today. They work like hell. They get paid nothing, basically, but they have a calling in their lives to serve and lead. It’s just a newfound respect. I don’t consider them below lawyers anymore. They have at least two cells in them.
Disclosure: “Yield discussed is as of 5/31/2017 using weighted average SEC yield and is historical performance of Kevin O’Leary’s family trust equity portfolio consisting of 40% OUSA, 20% OUSM, 20% OEUR, and 20% OASI. For most recent fund performance please visit the fund page: OUSA, OUSM, OEUR, and OASI.”
By Todd Shriber | May 23, 2017 — 12:00 PM EDT
Europe exchange-traded funds (ETFs) are experiencing a renaissance of sorts this year as investors look for alternatives to the lofty valuation multiples being assigned to U.S. equities. Investors considering participation in the Europe ETF market do not need to embrace higher-volatility stocks or lower-quality names to get in on the action. They can even earn income with ETFs such as the O’Shares FTSE Europe Quality Dividend ETF (OEUR).
OEUR, which turns two years old in August, follows the FTSE Developed Europe Qual/Vol/Yield Factor 5% Capped Index. That benchmark “is designed to measure the performance of publicly-listed large-capitalization and mid-capitalization dividend-paying issuers in Europe that meet certain requirements for market capitalization, liquidity, high quality, low volatility and dividend yield,” according to O’Shares Investments. (See also: Do Low Volatility Smart Beta ETFs Make Sense?)
An oft-cited rub with low-volatility strategies is that, while these funds protect investors on the way down, the emphasis on volatility reduction leads to leaving some money on the table when stocks are soaring. While that is the case on a historical basis across various low-volatility funds, it is hard to quibble with the 16.3 percent year-to-date return offered by OEUR.
Investors should also consider OEUR’s attention to the quality factor. Often, the quality factor as it applies to dividend stocks places more merit on a company’s ability to continue paying and growing its dividend with less regard for high yields. That works in favor of investors over the long haul because some high-yield dividend payers can have shaky financial positions, while the opposite is true of many consistent dividend growers. In other words, OEUR’s dividend yield of 2.5 percent is not overly impressive, but the ETF’s holdings can sustain and grow those payouts, traits that are more important than a high yield. (See also: The 5 Best Dividend-Paying ETFs.)
OEUR, which hit record highs on Monday, has a geographic lineup that is familiar to dividend investors experienced with European equities. The U.K. and Switzerland, two of Europe’s top dividend growth markets, combine for about 46 percent of the ETF’s weight. At 13.7 percent, France is the largest Eurozone weight in OEUR. Overall, the ETF features exposure to 14 countries, nine of which are Eurozone nations.
OEUR’s sector allocations are also familiar among dividend-oriented strategies, as consumer staples and healthcare names combine for 44 percent of the ETF’s weight. Due to the fact that many of those companies generate revenue in dollars and that OEUR is not a currency-hedged ETF, investors in the fund should favor the current scenario of the dollar being weak against the euro and other developed Europe currencies. (See also: Encouraging Signs From Europe With This ETF.)