When people see Kevin O’Leary, Mr. Wonderful on the TV show “Shark Tank,” they see a man willing to invest thousands of dollars in risky startups based on only a 10-minute presentation.
But the truth is, O’Leary’s a man who’s invested the bulk of his fortune in ETFs. In addition to “Shark Tank,” he heads O’Shares, an ETF family created to meet his specific investing needs.
The seven ETFs track indexes created by FTSE Russell that follow O’Leary’s investing criteria. Each company in the indexes must have 1) attractive operating metrics as defined by return on assets; 2) 20% less volatility than the market; 3) pay dividends. The portfolio must have no more than 5% in any one company and no more than 20% in a sector.
“People see me on ‘Shark Tank’ and think I’m the Wild West,” said O’Leary. “But I’m not. I’m an extremely conservative investor. My concern is preservation, and I want to make 5% a year forever. It’s not easy to do.”
O’Leary made his millions as a founder of Softkey, a publisher and distributor of CD-ROM-based software. It later bought Learning Co. and took its name. In 1999, Mattel acquired the company for $4.2 billion.
He put most of that money into a trust for his children that would pay out 5% every year in perpetuity. He wanted the trust invested 100% all the time and rebalanced every January back to 50% equity and 50% fixed income. He used the five investing criteria he would later use for the ETFs and said there could be no leverage or derivatives.
The annual 5% payout couldn’t come from return of capital, only interest, dividends or capital appreciation. When bonds paid 6.5%, the target 5% payout was easy to make. But as the yield on U.S. Treasuries fell, making 5% became a challenge without inordinate risk.
“Over the years, I’ve used every asset class: private equity, hedge funds, even alternative asset classes like owning forests,” said O’Leary. “You name it, I’ve done it.”
He said he found it interesting and frustrating that no matter who he hired or how successful, after about seven years, the manager’s strategy would blow up or go flat. He then decided to build his own mutual funds, and noted that his managers were using ETFs to “plug holes in periods where they needed to do allocations.” He tried to use ETFs for his trust, but every index violated at least one of his criteria, usually an outsize weighting in one stock.
He then went to the folks at FTSE Russell and asked them to make an index based on his criteria that would cover the equity portion of the stock/bond portfolio. They said “no.” They don’t make indexes for individuals, but they would test his idea to see if it had market potential. Out of that came O’Shares FTSE U.S. Quality Dividend ETF (OUSA). While capital preservation and yield are the fund’s mandate, not benchmark outperformance, in 2016 it beat the S&P 500: 12.3% vs. 11.96%. The yield on OUSA is 2.3%, compared with the S&P’s 1.9%. The expense ratio is 0.48%.
“Kevin’s approach to looking at dividend growth and cash flow is something that we think adds benefit to our equity weightings,” said Rob Stein, chief executive at Astor Investment Management, a Chicago RIA with $2 billion under management. The firm builds portfolios exclusively out of ETFs. “We believe O’Shares’ approach makes sense for analyzing stock selection, so we don’t have to drill down in individual stock selection. It’s a concept that makes sense to us and it’s being done rigorously.”
For geographic diversification, O’Leary asked FTSE Russell to build O’Shares FTSE Europe Quality Dividend ETF (OEUR) and a currency-hedged version O’Shares FTSE Europe Quality Dividend Hedged ETF (OEUH), which removes the effect of currency fluctuations. Then came O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI) and its hedged version O’Shares FTSE Asia Pacific Quality Dividend Hedged ETF (OAPH). In 2016, OASI beat the MSCI AC Asia Pacific Index 7.82% to 5.21% and yielded 2.8%.
O’Leary then asked Russell to build O’Shares FTSE U.S. Small Cap Quality Dividend ETF (OUSM).
While on “Shark Tank,” O’Leary has invested in 40 companies, but he said he wouldn’t put any of them in his trust. They are too high-risk.
“I love the ETF industry and the innovation that is going on in it,” said O’Leary. “And I’m proud to be a part of it.”
Originally published in Investor’s Business Daily.