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This article was published 1/11/2013 (935 days ago), so information in it may no longer be current.
He's a dragon in Canada and a shark in the United States.
Kevin O'Leary is one of the most recognized businessmen in North America. A billionaire venture capitalist, he is renowned for acerbically dismissing business pitches that can't show him the money on Canada's Dragons' Den and Shark Tank in the U.S.
He's also a co-host with Amanda Lang -- whom he refers to as the "most attractive communist on television" -- on CBC's Lang & O'Leary Exchange.
O'Leary is the man many viewers tune in to hate -- to see what inflammatory, nasty and often hilarious words will pour forth from the dragon's mouth.
So it's hardly astonishing he packed the house at Niakwa Country Club last month with about 250 people turning up to hear what the dragon -- or shark -- had to say.
O'Leary donned a different persona at the event hosted by Rob Tetrault Wealth Management Group at National Bank Financial. He was a pitchman for his eponymous mutual fund firm.
The tables had effectively been turned for a man who typically hears business pitches -- not makes them.
As chairman of O'Leary Funds, he made a compelling argument as to why these mutual funds may be worth closer investigation by investors wanting to be paid while they wait.
That's the kind of investor O'Leary is himself. He never invests in anything that doesn't pay -- a philosophy he learned early in life from his mother.
"My mother was very nervous about money because she came from a family where it was very difficult in the early days," he said. "She had a secret account where she put away 30 per cent of every paycheque."
She only bought investments that paid her to own them, building a substantial portfolio of dividend stocks and bonds over many years.
"Do you have any idea what an account with only dividend-paying stocks and bonds does over 50 years?" he asked the audience. "It beats everything."
Every one of the 19 O'Leary Fund offerings is built the same way, to produce income for its investors -- O'Leary among them.
The majority of his wealth -- held in an intergenerational for charity and the education of his children and their children and their children's children in perpetuity -- is entirely invested in O'Leary Funds.
"I need to make five per cent every year guaranteed for those five charities and for my extended family," he said. "I don't want to risk my capital, but I need to make five per cent."
That said, making five per cent conservatively is a tough chore in an environment of record-low interest rates, with little place to go but up.
And rising rates are poison for investors with money in bonds, preferred shares, real estate and dividend stocks in businesses that are interest-rate sensitive such as pipelines, telecoms and utilities. All these assets tend to fall in value when rates increase.
Even just the hint of rising rates can hurt these assets' prices.
"When (former U.S. Federal Reserve chairman Ben) Bernanke gave his speech last May, announcing that tapering (of stimulus) was coming -- we don't know when, but it will slow down -- a violent reaction occurred. "
O'Leary's point is this: Income-oriented funds can't rely on good, old-fashioned government bonds and other traditional assets to provide steady income for a five per cent yield. If they do, their investors face the possibility of a return of capital as part of that yield when interest rates rise.
And investors will flee from those funds.
Already, investor money has flowed away from bonds funds in recent months to other assets because Canadian investors have sustained bond-fund losses in the wake of Bernanke's speech -- and he didn't even cut stimulus or increase rates in the U.S.
Regardless, many Canadian bond funds took it on the chin. But O'Leary Fund's Canadian Bond Yield Fund didn't.
It is among the top performing bond funds in Canada year to date and received the highest rating -- five stars -- by Morningstar.ca, a financial news website that closely follows Canada's mutual fund industry. O'Leary says the fund is almost entirely made up of short-duration, high-quality corporate bonds. As a result, it's not as negatively affected by interest-rate hikes as funds that also hold government bonds.
That performance is a big reason why the host of the event, Rob Tetrault, a portfolio manager with the discretion to buy and sell stocks, bonds and other securities on their behalf, buys O'Leary Funds for some clients with smaller portfolios.
"Their bond funds are the best performing bonds funds in Canada over the last three years," he said in an interview with the Free Press. Normally, portfolio managers don't dabble much in mutual funds. After all, they're essentially giving up control of a portion of their clients' portfolios to another manager, and many mutual fund managers don't have the greatest track record of consistently beating their benchmark.
Tetrault admits he isn't by any means bullish on bonds, but bonds still have their role to play for investors who require investment income. The problem for those with smaller portfolios -- less than a million dollars -- is it's difficult to build a diversified portfolio of individual bonds.
"You could say in theory 'Why don't you just go buy these bonds yourself on behalf of the client and cut out the middle man?' " he said.
The problem he faces is buying affordably priced bonds in small amounts -- less than $30,000 amounts -- is challenging. The spread between what investors want to pay and what the sellers want can be large relative to the bid-ask spread for stock, and that effectively eats into their yield.
For this reason, Tetrault often looks to mutual funds for smaller investors, providing them with a diversified, low-cost allocation of bonds.
O'Leary's Canadian Bond Yield, Floating Rate Income Fund and Global Bond Yield Fund are among his top choices because they have led Canada in performance in recent years while charging low management fees.
The floating-rate fund is particularly attractive, he added, because it is a leading industry innovator.
It is the only Canadian fund licensed as an institutional lender to purchase this type of debt, loans made to profitable companies at a floating interest rate reset every 90 days.
"If you look at 21 years of returns on this asset class, it's 5.2 per cent good, bad and ugly," O'Leary said in an interview following the Niakwa talk.
These floating-rate loans are generally only available to institutional investors, but many Canadian mutual funds now have offerings that include them because they are less affected than other income-oriented assets when interest rates rise.
Canadians have invested about $2 billion in this fund class since July.
"It's an asset class that will be huge over the next five or six years," O'Leary said. "But you're not going to make more than 5.5 per cent."
For O'Leary's trust and O'Leary Funds' target demographic -- retirees -- that kind yield is crucial.
"People need to make five per cent a year because that's what they're used to living off of," he said, adding he too has lots of "skin in the game."
"In the end, celebrity doesn't matter. Performance matters."
And failure to do so could see O'Leary the dragon singed himself by investors.