Kevin O’Leary is best known as one of the hosts of “Shark Tank”—aka “Mr. Wonderful”—but beyond deciding what new entrepreneur to fund, he is a wealth manager for himself and his family first. His decision to start O’Shares Investments is founded in those family roots. The construction idea behind the firm’s recently launched ETF, O'Shares FTSE U.S. Quality Dividend (OUSA), as well as four other funds in registration, comes from the way O’Leary’s mother managed her money. O’Leary will be a featured speaker at Inside ETFs in January.
ETF.com: What brought you to start O’Shares and build your own ETFs?
Kevin O’Leary: I've been lucky as an entrepreneur. And I've amassed a certain amount of wealth. And I have to decide what to do with it, so I created a trust in 1997. It’s a very simple mandate. It takes care of kids from birth to last day of education, the entire extended family, and plus a whole bunch of charities that we’ve committed to for multiyear periods.
I'm going to do to for my kids what my mother did to me. She basically said, “I'm going to pay for you from the date of birth to the last day of education. And then I'm cutting you off. And good luck to you." And that’s it. I didn’t believe her. I should have. But it worked out.
The trust is designed to skip the generation. In other words, after they graduate, their children will get the same deal. I’ll guarantee to take care of them from the day they're born until the last day of education, and their kids. So it’s a structure that has to pay out 5 percent a year in perpetuity. That’s my challenge.
The trust structure is 50 percent equities and 50 percent fixed income, always. I've used all kinds of managers over the years, all kinds of asset classes, you name it. And the trouble I want to avoid going forward is style drift, particularly on the equities. What I decided to do recently was to use an ETF tool kit to do all of the equities; not the fixed income yet, just the equities.
ETF.com: What does that tool kit look like?
O’Leary: Here was the process: I've got a bunch of analysts that work for me. And I said, “Go look at all 1,700-plus ETFs and find me the ones that only pay dividends.” I have a personal philosophy. I will never buy a stock that doesn’t pay a dividend. That’s a lesson my mother gave me. She would never buy a security that didn’t pay interest or dividends, ever. I saw her own personal portfolio after 50 years of that strategy and the performance was unbelievable. She used corporate credits and large-cap dividend-paying stocks. She beat every index.
So I looked back at the data on the equities side. Over the last four years, 71 percent of returns came from dividends, not capital appreciation. I do not want to own any stocks that don’t pay dividends. We ended up with about 50 different ETFs that have been very successful. These are large ETFs.
But here’s the problem with these first-generation ETFs. They were market-cap-weighted indexes. After time, 10 or 12 names became 50-60 percent of the ETF. I don’t want that.
I was concerned about concentration—not enough diversification. So I asked my research team, “Can we talk to somebody and create an index that solves this problem for me? I don’t want to own any more than 5 percent of anything. I want complete sectoral diversification. And I want geographic diversification. I just want the good names. I want some quality metrics put in.”
And that was the beginning of OUSA, and it will be the same with [future funds] OEUR [the O’Shares FTSE Europe Quality Dividend ETF] and OASI [the O’Shares FTSE Asia Pacific Quality Dividend ETF]. We’re working with FTSE-Russell on this.
The reason O’Shares exists and OUSA is trading now is that it solves a problem for my family trust. I'm not telling people to buy it. I'm telling you I'm buying it. And if you can find me a better ETF, I’ll buy that too. But so far, I can't find it. So I'm building my own. That’s the story here.