How To Invest In The Stock Market With Kevin O’Leary Of Shark Tank
By: Ky Trang Ho, Forbes Contributor – 7/18/2015 @ 10:01AM
Kevin O’Leary, a star on “Shark Tank,” is exalted for starting a software business in a basement with a $10,000 loan from his mom and later selling it to Mattel in a $3.8 billion deal. The Canadian-born mogul’s shoal of ventures — made in and out of the ABC hit reality show — includes 32 businesses of all species, ranging from cupcakes to mutual funds to software. With his recent dive into the exchange-traded fund industry.
Also known as Mr. Wonderful, he hopes to grow his pod of five O’Shares ETFs from squid bait into a multi-billion dollar whale within three years. The first among them unleashed onto the New York Stock Exchange is O’Shares FTSE U.S. Quality Dividend ETF (OUSA). Since it debuted Tuesday, OUSA has hooked $1.26 million in investors’ money to total $6.3 million in assets under management, according to ETF.com.
Kevin O’Leary, a star on the hit show ‘Shark Tank,’ created O’Shares ETFs as an investment solution for his family trust and to give individual investors access to his strategy. (Photo by Andrew Burton/Getty Images)
OUSA invests in large- and mid-cap U.S. stocks that are screened for low volatility, high dividend yields and high-quality balance sheets. The five largest holdings currently among 142 are Johnson & Johnson (JNJ), Exxon Mobil (XOM), Apple (AAPL), AT&T (T) and Microsoft (MSFT). The three largest sectors are consumer goods, weighted 18%; health care, 17%; and technology, 14%. OUSA charges an annual management fee of 0.48%, which is on par with the 0.44% industry average.
O’Leary created O’Shares ETFs as an investment solution for his family trust. His ETF firm, O’Shares Investments, is a unit of O’Leary Funds, an investment management firm he founded with his partner, Connor O’Brien, in 2008. It oversees $900 million in assets with headquarters in Montreal. I spoke with O’Leary on the phone Friday afternoon.
Ho: Pretend, I am a Shark. Convince me why I should invest in OUSA?
O’Leary: One of the challenges that I have as an investor is that I have a family trust that I set up in 1997. It’s designed for something very specific. It pays for any of my family members from birthday until their last day of education. And then they don’t get any more. Then it pays for their children’s births through last day of education. It’s a multi-generational trust. It pays out 5% a year. So it has to be invested for the long term in a way that provides income on a monthly basis. It’s taking care of a lot of charities and a lot of people.
I assumed I would go buy ETFs because that’s the best way to do rules-based investing. You don’t want style drift. After I’m gone, I don’t want a manager managing my money because I don’t know what they’re going to do with it. I have a very strict discipline model in place. And so ETFs are the best way to do that.
O’Shares FTSE U.S. Quality Dividend ETF (OUSA) Details
Top 10 Holdings and Fundamentals
There’s 1,700 ETFs. I found 50 (dividend payers). I had my team do some research on them. The problem with most dividend-based ETFs is that they’re market-cap weighted. In other words, over time just because a company gets large, it gets a larger portion of the actual ETF. In some cases, the top five or 10 holdings are 60% of the ETF. I don’t want that. That’s not enough diversification because not every company is created equally.
I want to test the company’s ability to maintain and grow their dividend. I want to know they’re not increasing debt to pay their dividend. And I want them to be less volatile and less risky than the market.
So I approached the people Russell and FTSE said: “Could we create a new index with these rules? I want 20% less volatility, that’s a measure of risk. I want the company to grow and sustain its dividend. And I want to make sure the balance sheet itself is healthy. So that’s a new index they’ve created for me. And we put it into OUSA.
I am buying an ETF that fits exactly what I want to do. I am not telling other people to buy it. I am telling you what I am buying. This is what is going into my family trust. So not only do I do it for the United States, OUSA, I am doing for Europe (OEUR) and Asia (OASI). I am going to buy, for the trust, 50% OUSA, 25% in Europe and 25% in Asia. And frankly, if you have a better strategy, I will buy it.
I am just trying to find a way to generate income on a monthly basis, reduce my risk, and get tremendous geographic and sectoral diversification. I couldn’t find anything that did that, so I built my own.
Ho: How do you expect OUSA to perform over a complete bull and bear market cycle?
O’Leary: I think what it should do and what I’m hoping it will do, and time will tell, is it will provide me with income. Right now it’s providing 50% more income than the S&P (SPY) is providing. So I’m generating almost 3% instead of just 2% for the S&P. It’s less volatile. So when the market goes down, it gets less of that. And the quality of the companies is maintained by the rules.
It’s smart beta. This is the new generation of indexing, where you don’t just throw a company in because of its market cap. It has to go through a test to make sure it’s high enough quality to do that. So what I think it will do over the next 20 years is exactly that — protect my capital and generate income for me.
Ho: What are some of the investment risks that investors must consider?
O’Leary: There’s volatility in the market always. You never know what’s going to happen at any one time. But you have to think over the long term. So I look at it this way: I want to own companies that pay dividends. I will never buy a company that doesn’t pay a dividend. So I will never own a stock that doesn’t pay a dividend.
You never know with certainty what markets are going to do. But you know over time the markets have always provided a decent return if the company paid a dividend. I don’t own anything that doesn’t pay a dividend, and that’s the same with OUSA. They’re all dividend paying stocks.
Ho: Why did you create this as an ETF versus a mutual fund?
O’Leary: They’re both good. I have mutual funds as well. I have O’Leary Funds. This very cost efficient. And for certain investors that have family trusts, like I do, this is a very efficient way to invest. There’s no style drift. The rules are set in stone. You can’t buy a stock that doesn’t pay a dividend, for example. It’s got to pass the test in quality. It has to have a history of being less volatile than the market.
For certain types of investors like me that have an institutional bias, they want long term and no drift in the style. It’s a good style. It’s very cost efficient. This is only 48 basis points in fees. It’s less than half a percent.
Ho: What’s your marketing and distribution strategy for OUSA?
O’Leary: Some people know me as an investor. If you’ve been watching “Shark Tank,” you know I am a disciplined investor. I believe in distribution. I believe in dividends. I only buy dividend-paying stocks. My marketing strategy is simply to tell my story. I am not telling you to buy it. I am just telling you what I am buying. I am buying OUSA because it fits into what I need to do in the trust.
Ho: When do you think your other ETFs will hit the market?
- O’Shares FTSE Europe Quality Dividend ETF (OEUR)
- O’Shares FTSE Europe Quality Dividend Hedged ETF (OEUH)
- O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI)
- O’Shares FTSE Asia Pacific Quality Dividend Hedged ETF (OAPH)
O’Leary: They’ll probably come out in the next 60 to 90 days. I will be buying 50% in OUSA, 25% in OEUR and 25% in OASI. They’ll probably come before the summer is over.
Ho: Do you have plans to bring your Canadian mutual funds to the U.S.?
O’Leary: No. I plan to keep the O’Shares as a product of the U.S. because I think it’s the right product. I am happy to work with the Russell/FTSE people who do it. Mutual funds is a different market. It’s a different business. Right now I have traction with ETFs, and they’re solving my problem. My trust is in U.S. dollars. It is a trust that was founded in 1997 in Boston.
Ho: Are you going to try to get your other “Shark Tank” co-stars to buy your ETF?
O’Leary: [Laughs] They should always do what I do. I am the only shark that tells the truth. They should always follow in my footsteps. I tell them that every day. Whether they do it or not, that’s a different story.
Ho: If it doesn’t offend you, I would like to give you some of your own Shark Tank medicine.
O’Leary: OK. Sure.
Ho: Your ETF is very replicable. It doesn’t have anything proprietary. What’s to keep another big player like iShares or State Street from copying your idea, sell it for cheaper and crush you like a cockroach?
O’Leary: [Laughs] Actually, it is proprietary. No else has that index that I created. It’s unique. It doesn’t mean they can’t create something similar. But I am pretty confident that it’s going to take a while for competitors to catch up. Another thing is I do things my way. I wouldn’t spend this amount of time and money doing this if I already found something in the market. I am trying to solve something as an investor — my family trust. They could try. There are many others out there right now.
But O’Shares are O’Shares. People are going to buy them based on their merits. And I think the only thing that matters is performance. I believe in a competitive market. I am happy to be a part of it. I am bringing something special. Let the market decide.
I am not so sure it’s going to be easy to crush Mr. Wonderful. [Giggle]
Ho: What would happen to the business if you get hit by a bus? Can O’Shares thrive without your celebrity endorsement?
O’Leary: That’s what I think is important. I am assuming that I will leave this earth one day. I need to have something in place that’s going to manage my money long after I’m gone. That’s exactly why I created O’Shares.
In the end, what matters is performance. In the next five, 10, 15 years, 20 years after I am gone, it will still matter. That’s why I am setting up these rules. These rules are unique. This index is unique. The performance, I hope will be unique. It will continue to grow because it’s based on stability, yield, and quality. That’s going to matter 100 years from now. It’s going to matter 200 years from now. Companies come and go. The rules will capture the good ones and discard the bad ones.
I am very confident that this will be a competitive product. There will be many others that attempt to copy it, perhaps. But what will matter is how it performs. Not just for me but anybody else who buys it. I am betting that it will perform for my family trust for generations to come. We started this conversation with me explaining how the family trust is going to work. It’s got to work for the next 100 years.
Ho: How many people are in the family trust that are relying on this money?
O’Leary: They’ll continue to grow every time there’s a birth — a grandchild. It’s a new dependent. Now I have charities that I provide for as well. There are certain charities that I am committed to, some hospitals, educational institutions, and some arts institutions. I can’t commit to them and not pay them. I have to make sure that every year, there’s a distribution for them. That’s why I worry so much about this.
I am assuming that my kids will have grandkids. Hopefully, I’ll be around for them. They’ll have grandkids. And the trust will take care of them. The reason it will work is OUSA, OEUR, and OASI. That represents the gold. I am mining the very best companies that pay dividends for the future.
Ho: How much of your money did you put into this to develop the ETF?
O’Leary: I don’t disclose my net worth. You will find many sites that are trying to figure out what I am worth. But I along with my partner, Connor O’Brien, have funded many businesses that we’ve been working on for years. We pay for all of them.
Ho: How much assets under management does the ETF have to reach to make back your money?
O’Leary: Generally, you got to get to $200 million. That’s the minimum to sustain an ETF. I am much more optimistic these ETFs will grow much larger than that.
Ho: What are your sales goals? Do you have targets five years, 10 years out?
O’Leary: I do. I am hoping that within three years, each of these will be at $5 billion dollars.
Ho: What would make you shut down the ETF?
O’Leary: I don’t know why I would do that. I need them. I don’t set them up to shut them down. Obviously, if nobody saw any merit in them and I was the only investor, that would make sense. But that’s not the case. People look at ETFs on the basis of their ability to perform. I think this will be a very competitive product.
People will look at it in light of all the other offers, just like I did. I looked at everything in the market. I whittled it down to 50 that I thought would work. None of them met my objective, so I created my own.
*Ky Trang Ho is the founder of Key Financial Media LLC, which produces content and thought leadership for financial advisors and investment strategists.
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