Kevin O’Leary’s Family Wealth Portfolio

Connor O’Brien:
Kevin, tell us what you’ve done with your family wealth portfolio, the equity portion, but also the rest of it.

Kevin O’Leary:
This has been a mandate that’s been around for decades, and it’s designed to provide a 6% distribution year in year out to family members and various charities that these trusts support. And it’s the traditional trust structure. It was 50% fixed income, 50% equities, long-only. That’s changed recently, because of what I consider risk in fixed income and so you got to think of it this way, that the rules of engagement right now are if you’re sitting in cash, and inflation is at 6, between 6 and 7%, you’re being taxed to cash pays about 22 basis points. So, you’re getting taxed at over 6% in terms of buying power. That’s really disastrous for a trust and so you have to decide if you’re going to go fixed income or are you going to go equity. So we’ve moved our model from 50/50 to 70/30. So, we’ve reduced our duration. Now, a 6% bogey, is what’s distributed and right now BBB commercial credits, or if you’re lucky to, on a 5-year note, get three and a half, three point two, three and a half in investment grade. So, you’re basically missing your bogey by 250 basis points on the fixed income side. You might need to make that up on the equity side. So that’s why the change to 70/30. On the equities, I think given the inflationary environment, you want companies that perform with, that have pricing power. So, companies that are able to raise their prices past the launch to consumers and inflation tend to do quite well and that’s a subset of the S&P 500. Like, for example, I don’t really want to be in airline’s right now with their balance sheets upside down, and all of their growth coming from the cattle car ticket to Europe, you know, $299 return kind of thing. They’ll make no money on that, and they owe billions on the balance sheet. So, you want to avoid those kinds of situations and try and find companies that actually grow cash flows during, you know, Fed increases, and I don’t think the Fed is going to raise rates more than 150 basis points. So, maybe it’s 25, maybe it’s 50. But you have to kind of think about this in terms of a portfolio.

So I’m us- I obviously talking my own book when I say this, but for, for equities, I don’t pick individual stocks anymore, I use ETF indices. And I’ve, my blend is sort of OUSA 40%, which is a high-quality subset of the S&P 500. OEUR, which is a subset of the European market, the top 50 large-cap names, very strong balance sheets, very interesting in terms of valuation, because many European companies, even giant ones, trade at a discount to their American counterparts, yet those European companies service the American market with sometimes half their sales. So it’s, Europe’s been a place everybody’s hated for a long time, I don’t feel that way about it. I want some exposure to Swiss, Euro and British companies and I use that for 20%. And then the subset of the Russell 2000, I would never invest in the Russell 2000. The majority of the companies there make no money, but an index like OUSM mines for the companies that do make money and provide distributions. And you know, generally speaking in a mid-cap, small-cap, you try and look for slightly higher growth in the S&P. So that’s another 20%. And then, for my growth, I use OGIG, which is a unique index, very hard to find anything like it – global Internet giants, obviously much more volatile, but a very interesting product to keep track of companies growing at 20, 30, 40, 50% a year and not just domestically, not just the FANGs, but the global companies. And so, in fact, in most years, the FANGs are the least performing in that index. They’re well known, but they’re certainly not growing as fast as some of the other companies around the world that, you know, should be owned, in my view. So that’s sort of the mix that I’m using in terms of managing for income and managing for, for equity versus fixed income.