2011 was the year of Ouch for the folks at One Restaurant in Aviator sunglasses.
Given the rampant interest in last week’s post about large scale investor redemptions at O’Leary Funds (see prior posts “Media Hat tips #67 and 68” May 25-12 and “Investors redeemed $500 million of O’Leary Funds in 2011” May 23-12), I though I would do some more digging into Fund Rock Star Kevin O’Leary’s 2011 financial statements.
It seems hard to imagine, but all but one of Mr. O’Leary’s mutual and closed end fund products saw a “decrease in net assets from operations” in 2011, versus none in 2010. Think of this metric as the income statement for fund, since that’s in fact what it is. Revenue minus expenses plus/minus changes in asset values. Here’s how the income statement works at a representative O’Leary Fund (I’ve chosen the 2011 audited financial statements for the O’Leary Canadian High Income Fund as an example):
Investment Income (millions)
Interest Income: $6.6
Dividend Income: $6.3
Total Income: $12.85
Management Fees: $4.0
Service fees: $0.989
Total Expenses: $5.8
Net Investment Income: $7.045 million
So far, so good, right? On $221 million of median Canadian High Income Fund assets during 2011, that works out to be a 3.2% annual return, pre tax. Not great, but at least it is a positive number. But let’s look at the balance of the Fund’s income statement:
Net realized gain on sale of investments: $6.6
Net realized loss on derivatives: ($4.9)
Net unrealized loss on investments: ($18.8)
Transaction costs: ($0.845)
Net Loss on Investments: ($17.84)
Decrease in Net Assets from Operations: ($10.8) million
Despite earning $7.045 million of net cash-type income from the Fund’s vatious investments, after management fees, that all got wiped away by mark-to-market losses in the portfolio, realized derivatives losses and almost $1 million of transaction (ie. trading, see prior post “Money manager churn alert!” Sept 8-09) costs. $7 million of net investment income becomes a $10.8 million loss from operations once the accountants add up everything else. By way of example, in 2010, this particular fund earned $36.8 million from ops; investors experienced quite the harsh whipsaw over a short timeframe.
Across the 24 of Mr. O’Leary’s funds that experienced losses from operations, some suffered more than others. Here they are, ranked by the largest hits:
O’Leary Yield Advantaged Conv. Debentures Fund: -$28.32 million
O’Leary Convertible Portfolio Trust: -$26.29 million
O’Leary BRIC-Plus Income & Growth Fund: -$25.74 million
O’Leary U.S. Portfolio Trust: -$14.28 million
O’Leary U.S. Strategic Yield Advantaged Fund: -$12.76 million
O’Leary Canadian High Income Fund: -$10.83 million
O’Leary Strategic Yield Plus Fund: -$9.98 million
O’Leary Global Yield Opportunities Fund: -$9.50 million
O’Leary Canadian Equity Income Fund: -$6.36 million
O’Leary Canadian Income Opportunities Fund 2: -$5.62 million
O’Leary Strategic Yield Advantaged Class: -$3.81 million
O’Leary Global Equity Yield Fund: -$3.35 million
O’Leary Strategic Yield Fund: -$3.08 million
O’Leary Hard Asset Income Fund: -$2.98 million
O’Leary Global Bond Yield Advantaged Fund: -$2.38 million
O’Leary Global Bond Yield Fund: -$1.48 million
O’Leary Global Infrastructure Yield Fund: -$1.13 million
O’Leary Floating Rate Income Fund: -$1.10 million
O’Leary Floating Rate Portfolio Trust: -$0.53 million
O’Leary Bond Portfolio Trust: -$0.36 million
O’Leary U.S. Strategic Yield Fund: -$0.29 million
O’Leary Canadian Equity Yield Fund: -$0.03 million
O’Leary Canadian Balanced Yield Fund: -$0.02 million
O’Leary Conservative Income Fund: -$.000985 million
O’Leary Canadian Bond Yield Fund: +$0.38 million
For the life of me, I can’t figure out how Mr. O’Leary could pull this feat off. All but one of his bond funds was in the red, despite the fact that the bond market was on fire in 2011 — with the DEX Bond Universe up 9.7%. And that’s made up of 1,135 Canadian government and investment grade corporate bonds; nothing exotic about that.
On the equity side, the Dow 30 rose 5.5%, while the S&P 500 finished down 0.22% last year. Which leaves KO no macro excuse that explains away the giant sucking sound at his equity funds.
How could this have happened?
There’s no real correlation between the size of the fund and the losses, either. For example, funds that suffered 2011 operating losses representing more than 15% of total assets included funds as small as $14.3 million of net assets and as large as $140.3 million of net assets. Of the 24 funds that had operating losses last year, 8 different funds (four mutual funds and four closed end funds) lost more than 15% of net assets. That’s not chump change when retail investors were told to target annual distributions of 5-6%.
I’m sure there must be some logical explanation. Perhaps KO could fill us in?
(disclosure: this post, like all blogs, is an Opinion Piece)