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Kevin O'Leary: He's not a billionaire, he just plays one on TV Add to ...

Former employees of O’Leary Funds who have intimate knowledge of operations say that complaints over inappropriate investments aren’t the only frustrations voiced by a plethora of advisers who have called in the past year. Performance is an even bigger issue. Two funds launched in the first half of 2011, the Yield Advantage Convertible Debentures Fund and the U.S. Strategic Yield Advantaged Fund, have lost more than 20% each, before distributions. The advisers want to know how O’Leary’s supposedly safe funds can lose so much money so quickly.

Their frustrations have hurt sales. The Floating Rate Income Fund sold only $67 million in August, 2011, and the Canadian Diversified Income Fund only $26 million last December—while O’Leary funds launched in 2009 and 2010 easily sold over $100 million each. O’Leary argues that the closed-end market in general has slowed, and that the firm has seen solid success with some mutual funds, such as its Canadian Bond Yield Fund.

But over all, advisers are clearly pulling their money. Earlier this year, McQueen wrote on his blog that redemptions seemed high at O’Leary Funds, based on last year’s publicly available financial reports. He was right: It turns out that investors pulled $253 million last year, amounting to about 21% of all assets under management. This trend appears to have continued since January. The firm’s assets under management stood at $1.2 billion at the end of 2011. The figure had slipped by early September to a little over $1 billion, even though the market had moved higher in the interim. (That said, assets under management can be a tricky indicator because the number rises when the market does, even though no new money may be coming in from investors.)

Of course, many firms in the fund industry, not just O’Leary, have been hurting. In June and July, giant AGF Management Ltd. reported a 5% drop in assets under management. However, industry money is flowing out of equity funds and into bond and balanced funds. In other words, it’s flowing to the kinds of funds that O’Leary sells, yet the firm still has net redemptions. A big-name broker, who was one of the very first investors in O’Leary Funds back in 2008, is so frustrated that he’s decided to pull all of his clients’ money. Net redemptions in this environment “means they can’t focus on making people money,” the broker says. “They have to essentially put out fires all day long, and [focus on] raising money when it may not be the best time to be selling to the market.”

O’Leary Funds undoubtedly has relationships with hundreds of brokers across the country, and some aren’t worried at all. But there are some that O’Leary and O’Brien must now personally reassure—people like David Chellew, who works at Burgeonvest Bick Securities Ltd. in Toronto. Back in 2010, Chellew publicly said he would not recommend O’Leary Funds to his clients, since they lacked a long-term track record. Not long afterward, Chellew and some of his colleagues met with O’Leary, whom they grilled for two hours. Chellew came away from that meeting impressed but still unwilling to invest, taking a wait-and-see position. However, after the redemption issue blew up this year, he became skeptical again.



No one is sounding the death knell for O’Leary Funds. But former employees say internal operations need to change if the firm is going to attract talent.

Employee turnover is high—and some of those who have left are disgruntled because, they say, they were promised equity that never materialized. O’Brien says some equity has been issued: “The equity is something that is granted to key employees that have made and continue to make a significant positive contribution to the value of the business.” He and O’Leary now own 45% of the business each, he says, since there is an equity pool of 10% for employees.

On the record, O’Leary and O’Brien have downplayed employee turnover rates, arguing they are the norm in any start-up. They have also firmly denied that the firm has been shopped around. But one thing they do not deny is the potential for changing their product mix. The two men started out by exclusively selling closed-end funds, and lately they’ve been targeting mutual funds, yet several sources noted that O’Leary has been meeting with numerous people in the industry about the prospect of launching exchange traded funds, or ETFs, that charge extremely low fees. “If [investors] want to buy a product like that, we’ll be there,” O’Leary says.

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