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Whether you’ve seen him on various television shows such as BNN’s SqueezePlay, or as a ‘dragon’ on the CBC’s Dragons’ Den, Kevin O’Leary is truly a colorful character. With his recent move from BNN to the CBC’s The Lang & O’Leary Exchange, along with his appearances on ABC’s Shark Tank, chances are, you have seen this cat on the tube.  One thing is for certain – this guy is one busy man.

But have you heard of his funds? And could they offer sound investment opportunities to for you and your hard earned dollars?  The Canadian billionaire who made his fortune in the consumer software industry is never shy in expressing his thoughts or pursuing new ventures.  After selling his company back in 1999 to the Mattel Toy Company “for a staggering 3.7 billion dollars”, he decided to go on and form his own mutual fund company, O’Leary funds.

The company’s site will tell you that “O’Leary Funds was formed by Stanton Asset Management CEO Connor O’Brien, and top-rated television host Kevin O’Leary to provide investors with deep value, tangible yield and unique global investment opportunities.”

Let’s take a closer look at the types of funds that are currently being offered to the investor and then compare some of the pros and cons associated with investing in any of the O’Leary Funds.

In terms of the closed-end funds, here is the list of funds available:

  • O’Leary Global Equity Income Fund (OGE.UN)
  • O’Leary Global Infrastructure Fund (OGN.UN)
  • O’Leary Global Income Opportunities Fund (OGO.UN)
  • O’Leary Global Canadian Income Opportunities Fund (OCY.UN)
  • O’Leary Founder’s Series Income & Growth Fund (OFS.UN)
  • O’Leary Canadian Equity Income Fund (OCZ.UN)
  • O’Leary BRIC-Plus Income & Growth Fund [IPO on Jan 26, 2010 (NEW)]

Regarding mutual funds offered to investors, the company offers its new O’Leary Strategic Yield Class fund (Class Series A, F, F6, and T6).

From my perspective, I believe that some of the pros in relation to some of these funds are that many of them offer global diversification  “by region and by sector”, and their investment funds are primarily allocated in “dividend-paying common shares, preferred shares, and bonds of public issuers, with each issuer generally having a market capitalization of $1 billion or more”.

Equally importantly, if we check out some of the current yields of some of the funds we find that most of the closed-end funds offer above-average respectable yields between 6%-8% with distributions paid out monthly. Having shares can allow for the investor to have an income stream while waiting for long-term capital appreciation, unlike many other funds in the industry.

Now comes the cons, and in my view, they cannot be overlooked. Despite some of the positive elements to some of O’Leary’s funds, on the flip side, unfortunately, we know there are MERs (management fees) associated with purchasing funds.

After navigating the company website for a considerable period of time in search of the funds’ associated MERs, I came to the conclusion that I would have to first seek elsewhere as the site was not as open and transparent as I hoped it would be. My gut was telling me that there was ‘more than meets the eye’.

It turns out that the MERs appeared to be relatively high indeed. A spring 2009 post by Wellington Financial states that the MER for OGE.UN as an example was “at 3.52%…a far cry from the ‘low’ 1.5% level that Mr. O’Leary promised last summer”.

O’Leary created a hidden “vampire fee” by supposedly originally stating that the OGE management fee would be only 1.5%, but because of the 0.4% trailer mentioned in the fund’s prospectus, the management fee is now 1.9%.

After reading this, I immediately went to investigate further and finally opened up the O’Leary Global Equity Income Financial Statements, June 30, 2009. In it, on page 14, I was able to confirm the above-mentioned comment after reading the following:

“…the Manager is entitled to an annual management fee of 1.5% of the net asset value of the Fund at month-end, plus an amount equal to the service fees, paid monthly in arrears, plus applicable taxes. The Portfolio Manager will be remunerated by the Manager out of the management fee. Savtrev will be remunerated by the Portfolio Manager. The Manager will pay registered dealers a servicing fee equal to 0.4% annually of the net asset value per unit for each unit held by clients of the registered dealers, plus applicable taxes.”

After investigating some of the other funds, they too had the 1.5% + 0.4% servicing fee for a total of 1.9%. Depending on your level of comfort, this may be a positive or negative aspect to your own personal strategy.

Personally, my investment strategy no longer entails me owning funds in general. Despite the fairly lucrative yields that the O’Leary funds offer, coupled with an impressive basket of equities he and his team have concentrated on for global diversification and capital appreciation purposes, I just cannot get over the management fee component.

My position is that I would rather invest directly into equities and other investment vehicles, which do not entail buying funds. What about you? Would you invest in any of the O’Leary funds? Do you already own some of them?

This is a guest post by The Rat from Ending The Rat Race.

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