US Global Investors Inc (GROW) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding, and welcome to U.S. Global Investors exclusive webcast, U.S. Global Investors third quarter of fiscal year 2008 earnings announcement. Please note that the slides you see on your screen are controlled by the presenters. Also, you may print a copy of today's slides at any time by clicking on the print slides button on your screen. A question-and-answer session will follow today's presentation. (OPERATOR INSTRUCTIONS). We would now like to begin by introducing Terry Badger, director of communications at U.S. Global Investors. Mr. Badger, please begin.

Thank you, operator, and welcome, everyone, to our webcast announcing results for the third fiscal quarter of 2008. Presenters for today's program are Frank Holmes, U.S. Global Investors CEO and Chief Investment Officer; Susan McGee, President and General Counsel and Catherine Rademacher, Chief Financial Officer. During this webcast we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don't pertain to historical facts are subject to risks and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-Q filing for more detail on factors that could cause actual results to differ materially from any described today in forward-looking statements.

Any such statements are made as of today, and U.S. Global Investors accepts no obligation to update them in the future. I would now like to turn the presentation over to Frank Holmes, CEO and CIO for an overview of the third fiscal quarter.

Thank you, Terry, and welcome ladies and gentlemen to today's presentation. I want to weave in and out in this presentation, if we go to page 4, if we could move to page 4 and highlight some of the differences that we are seeing between revenue, net income and earnings per share. As you can see in this financial snapshot, which Catherine Rademacher will go into more detail in a few minutes, the revenue declined. Now let's look underneath the core. Look at our core revenue as the expression is, let's look under the hood, and what is important here is that our offshore fund business, which is growing as I will show you in assets, was basically flat for the quarter in performance fees. And that is the big difference between revenue a year ago to this year.

Net income, as you can see, was $2.12 million versus $2.41 million which drops down to earnings per share of $0.14 versus $0.16. We have several investments, which were made a long time ago that can have some volatility to earnings, and for us we want to highlight to you that our core business, our mutual fund business is basically growing. And that loss in earnings for a year-over-year basis is really -- it happened all in a couple days in March as junior companies were knocked down due to a liquidity event at quarter end. In fact, a year end for a lot of brokers is the end of March, and we witnessed this and this impacted us for the earnings. But if I look back a year ago this was positive to us. This investments looking at these several small investments, which we are liquidating in up days and we're trying to capitalize on.

However, the core business is actually on a year-over-year basis for us, is positive, and that is what we want to report to you. Let's go to slide number 5 and try to break down and compare to how we are growing. We are very happy to see that in the past three years our compounded annual growth rate, the CAGR is a 37% compounded growth rate. The offshore client's funds assets have grown 276% over the three-year compounded annual growth rate. And what is interesting here is that the assets did grow, as you can see, but the performance fees this past quarter really didn't. And there is a reason for that is because the micro cap, small cap category which these funds focus on were basically down for most people; we were thrilled that we, in fact, were flat. There are funds in offshore funds that are in this space that were down 25% for the quarter.

Our alpha shows that we were basically flat to up 2%. So from that end it is not enough to get a big incentive fee, which I mentioned to you a second ago, but it does give you an idea of the leverage. We are starting to see better performance coming into this quarter after the massive injection of $800 billion by the Federal Reserve to kick start this economy. Hopping over to page number 6 is assets under management. As you can see the quarterly growth is sequential. For us it took a dip only because of market volatility. But overall we are very, very happy when we compare this to our peer group, which I am going to give you some comparables to. But on overall assets under management we had several leaders for the March ended quarter, for our complex as a boutique, unique, small group of collection of funds competing against over 6000 funds we had several funds, once again, were in the very top as showing strong leadership.

Next page is 7, is fund recognition. We have been asked a couple times to go back since this great supercycle started, and I took on the reins as the chief investment officer. How many awards have we won? And basically we have won 26 Lipper Fund Awards and certificates since 2000. So for a small boutique, a unique asset class, we are very proud of this. And what is also very important is the big picture. The big picture of mutual funds and the growth is in fact is international funds. This is the category that is growing, and this is the category where we demonstrate leadership and resources as oil is to $120 a barrel and growth in the emerging markets.

Hopping over to slide number 8, shows you that at year end Global Resources Fund was the best natural resource fund of the 75 funds, in consistent returns for the past five-year period ended December 31sy, and World Precious Minerals were the best gold oriented fund out of 44 funds in consistent returns for the past five-year period. And what is interesting that World Precious Minerals for this quarter is not have that great leadership is because of its exposure to these junior mining companies that are under valued. it doesn't matter how liquidity event. They've been hammered, knocked down to way under historical valuations which put them as very attractive. However, it does put a lag in. We saw this happening last August, this bifurcation between big cap and small cap and its a fact that has had a short-term impact but we feel very comfortable about where we are in the valuations we are being able to be able to look at stocks are extremely attractive.

Also, which on page 9, I like to highlight to investors is that it is not just resources that we have our unique expertise and our processes. Our processes have allowed us to turn around and show near-term tax-free as the best achievement fund for short-term intermediate bond fund. In fact, now the yields on this are much stronger than money market funds. And so we're very happy with this particular fund. And we are also very, very proud of the fact that we can deliver alpha, not just in one asset class, but in several categories.

Hopping on page 10, and I'm sorry I am really laboring on this thing on our fund performance, it is not so much to brag to you about it, but it is much more this is what drives our business model. If we don't perform, assets do not flow to us. So it is very important for us to highlight the key value driver of this whole equation is performance, performance, performance. And you can see that seven out of nine US global equity funds appear in the latest Wall Street Journal rankings out of top performing funds.

The next page is 11, showing you the fund performance, going with all the natural disclaimers you have to have and disclosure statements. You can compare those different funds. And I'm going onto page 12, also to point out to you that since we've taken over the homes fund, that used to be the Bonnel Fund, we have outperformed the benchmark using our processes, focusing on that return capital model, looking for that 20% minimum return on capital, looking for companies demonstrating momentum and growth in their cash flow to earnings of at least 20% and revenue top line growing at 10%. So that sort of discipline and that global reach has been showing alpha in many of our different funds.

The branding strategy. We continue to page 13, as the highlight regular being on CNBC, on Bloomberg, comment on markets and getting a big picture, big beam, this branding is education. As we mentioned last quarter we've won several awards last year for our education and now we've come up with a new share report that goes into great detail to infrastructure. Frank Talk continues to grow. It is on global trotting. It is in books I've read, articles I think that are interesting to me which we discussed in portfolio; I am sharing that with the public. And you can subscribe to that and the investor alert also continues to grow as a medium. Every week is a discipline by the portfolio team, looking at the strengths and weaknesses of the past week; just like a professional basketball team looks at the game film for last week's game and they look at whom they are going to play next week, we do the opportunities and threats for next week. That discipline shows up in the investor alert, which goes on every Friday.

Hopping over to page 14 is newsletter support, more than one million newsletter subscribers, have feature stories on our funds and what is different about us, what is unique about us and different themes of how we are key players in that space. This has been an important factor because most of these people that subscribe to these newsletters are paying money. And people that pay money actually they pay much more attention to the advice and the commentary made by these newsletter writers.

The shows up in as you can see on page 15, I like to compare this to our peers. How are we doing relevant to our peers? U.S. Global year over year is plus 13%. Our peers is plus 8.4%. On a quarter-over-quarter U.S. Global is -2.5% whereas Lipper was -4%. So we outperform on the assets under management growth. This is important for contextual thinking because I am going to show you some other visuals that this is out of line of how the share price has acted in light of our asset growth and some other factors when you look bottom up at our stock.

Earnings, let's compare our earnings to the Lipper peers. U.S. Global Investors net income was -12%. And as I highlighted to you, our core business is, in fact, up on a year-over-year basis and fluctuation of market impact of that. When you take a look at Lipper peers they are down more than 15%, and some have had massive, massive losses in this whole subprime debt debauchery.

Next page is return on equity. We are very proud that when the shareholders we run a very lean, mean fighting machine. That low base and high bonuses right across the board. As you can see that our returns on our equity are much greater than our Lipper peers for one year and a three-year compounded is still substantially greater.

Next page, debt to equity, 18. Why are we showing you this? Well, we noticed that most of the Lipper peers are 48% leveraged. And this whole fear of what is taking place with the debauchery of subprime debt in the marketplace there has been a focus from looking at income statements to analyzing balance sheets. Well, when you look at our balance sheet it is pristine. It has no debt. We've highlighted comment before that we do not have any subprime debt products, and we're very paranoid about this whole issue. And so with that our equity base is much healthier, and we have very strong free cash flow.

This goes on to the next page, is the asset growth opportunities. And I think it is important that you see that this is the future, and these are significant changes. And I am going to turn it over to Susan McGee, our President and General Counsel.

During the first quarter of 2008 our institutional services team had completed several negotiations with significant distribution partners. As we discussed with you previously, one of our top priorities starting in early 2007 has been to increase our share of fund sales through intermediary. This does reflect a trend in the industry. According to the ICI, approximately 75% of new money coming into mutual funds is coming in from the so-called advice channel, that is financial advisers and other types of intermediaries.

For a brief overview of some of our more significant distribution arrangements reached during the quarter, one includes Merrill Lynch, there are 16,000 financial advisers in Merrill Lynch that are now able to invest in this global investors fund. Last year Merrill placed nearly $100 billion in nonproprietary mutual funds. So this is obviously a big win for us to get our funds in front of these advisers. We also have a new distribution partnership with Morgan Stanley. Morgan Stanley has more than 8000 financial advisers, and these advisers on average manage $85 million for their clients.

We also reached an agreement with Linsco Private Ledger for a new platform arrangement with them, and it does provide U.S. Global funds with a more attractive placement within the array of funds within LPL. LPL is the largest independent broker-dealer in the country. So when you combine Merrill Lynch, Morgan Stanley and LPL this gives our institutional sales team access to nearly 30,000 financial advisers.

In addition, there are 90,000 members of the Wisconsin Education Association who are now able to invest in our biggest fund, the Global Resources Fund in their retirement account. We announced this agreement previously in our last quarterly webcast. We are very, very pleased with these distribution agreements. However, we are not resting. We are in various stages of discussions with a number of large firms across the investment sector, consultants and product content managers and others that we've identified as having good potential for us to make agreements with.

Thank you, Susan. Going on, I've given you the past, and Susan has given you the future opportunities. What is important when you look at strategic insights which tracks this industry, the money flows are going into international funds. There is basically the psychology in America is getting away from only America is a place for opportunities and growth. George Soros and his recent book basically highlights that the growth opportunities are in China and India, and emerging economies that embrace policies for peace and prosperity. And we are those asset classes. So I think that our future looks very, very healthy. And the big factor is this performance, which will hopefully we stay focused on our processes. It is always like a thing like a coach has of a professional team. They focus on those processes. I believe that we will be able to demonstrate very good fund performance relative to our peers.

Well, that is the past and the future. Let's take a look at rate today. What is happening in the market, page 20. In the past year the S&P versus the Russell 2000; in the past month I have attended several conferences as a student, particularly hedge fund conferences in Europe, and I wanted to highlight to shareholders what took place last August. There was a margin call made by banks to their prime brokers that wasn't just to subprime debt hedge fund managers. It was to every form of a hedge fund manager.

If you have a $2 trillion industry and some of these hedge fund managers leveraged 10 to 1, and on average more than 2 to 1 and all of a sudden due to the banks' mortgage problems they start folding in capital from everywhere they can get, they go to their prime brokers and it wasn't, as I said to you, one asset class where the problems were coming from the bank. It was all asset classes ran to the door at the same time. And when you think of the volatility S&P it was calculated with these funds that are quant funds that are short and long, the lowest [PD] to highest PD stocks, etc. that the volatility in one day expanded 18% for $1 billion market cap companies.

Well, if that expands to 18% with this volatility crisis because of the liquidity crisis, not because we are in the wrong asset class or the economy unwinding, how bad the economy is, know how to deal with liquidity. The S&P had volatility of 18%, can you imagine what happens to Russell 2000? And we are in the Russell 2000 index, so it has been hammered even more with greater volatility. We want to put this in context for you to understand that the Russell 2000 earnings are better than the S&P 500 overall. However the liquidity has impaired this and I think it looks like an opportunity for Russell 2000.

Let's take a look at the GROW versus the Russell 2000. Here's the greater anomaly on page 21; looking for one year we far underperformed the Russell 2000. Financials have also been hurt in the Russell 2000 like the S&P because of all of the subprime debt related issues. And with that we've commented we do not have any of these issues. We have a pristine balance sheet, and it's interesting to see that we have underperformed for the quarter and for the year, which is not in tune with how we are doing looking at a stock on a fundamental analysis, bottom-up rather than top-down. So this is where the anomaly is taking place.

Then I want to compare the next page is how are we doing versus Franklin Legg Mason. Franklin is an important comparison because Franklin is a great fund group, who is also one of the early fund groups into emerging markets particularly after acquiring the Templeton group of funds. And their bigger market cap as I showed you would be more like the S&P 500 versus the Russell 2000. How we've done against them even though they've had bigger earnings losses than we have. And that is more from their core business. And then how we're have done against Legg Mason.

Legg Mason has had very serious issues, and it is sad because they are a great fund group. And I just think it has been really challenging for them. However, if we are not leveraged, our balance sheet is not leveraged like these companies and we have core earnings and we have the leadership from the best asset classes, there is a huge anomaly of bifurcation taking place that makes GROW standout as very undervalued according to other people who have come to us and contact to us and us showing you when we do this type of analysis.

The next page is going to go to the income statement. I've given you the top view flying at 50,000 feet. Now we are going to go to the bottom-up view with Catherine Rademacher, our CFO.

Good morning. I would like to briefly summarize our results of operations for the third quarter of fiscal year 2008, which ended on March 31st. Earlier Frank discussed our growth in assets under management, and I just wanted to note that in total I wanted to reiterate our average assets under management were up 14% to $5.5 billion for the quarter ended March 31st compared to the same quarter last year.

As we've noted in past webcasts our assets under management are one of the main drivers of revenue. So starting with revenues on page 23 on a GAAP basis we recorded total revenues of $12.3 million for the quarter and although our total revenues were down slightly by 1.4% year-over-year, primarily due to unrealized losses on corporate investments that Frank touched on, our core operation including investment advisory fees and transfer agency fees were up.

Specifically, our investment advisory fees increased by 1.4% year-over-year to $10.3 million, largely due to increased assets under management. Secondly, transfer agencies increased by 36.5% to $2.1 million primarily as a result of a revised transfer agency agreement that was effective April 1st of last year that incorporates the transaction and activity based fees.

And the last thing I want to touch on in revenues is our investment income. That decreased 133% for a loss of $226,000. Again, most of that decrease was the result of unrealized losses on our corporate investments and as we mentioned in our Qs and K filings and our webcast, that number can be volatile. We are required by accounting rules to include any unrealized gains or losses on our trading securities and earnings. On a non-GAAP basis had we excluded our corporate investment activities to better reflect our core operation, our total revenues would have increased 6%.

Moving on to expenses on page 24, our total expenses for the quarter were approximately $9.1 million, a 4.9% increase over the same quarter last year. And the three areas that had the largest impact on expenses were first, employee compensation and benefits increased by 18% to almost $3 million, primarily due to an increase in the number of employees as well as an increase in selective salaries to remain competitive in the market.

Secondly, platform fees increased by 29% to $2.3 million as a result of increased flow to the broker-dealer platforms and the last item I wanted to discuss was G&A. The two I just discussed were somewhat offset by a decrease in G&A. G&A decreased by 23% to $1.5 million due to lower consulting fees, travel expenses and legal fees.

And that brings us to page 25, net income, that we had net income of $2.1 million or $0.14 per share compared to $0.16 for the same quarter last year. Again, on a non-GAAP basis had we excluded our corporate investment activities that we discussed earlier in both comparative quarters and only included our core operations, our net income would have increased 10% to $2.4 million, and EPS would have increased to $0.16 versus $0.14 in the comparative quarter.

Finally, I would like to touch briefly on the balance sheet on page 26. As you can see our cash and cash equivalents have increased by 56% to $23.1 million since June 30th of last year, the end of our last fiscal year. In addition, cash, cash equivalents and marketable securities combined make up about 77.5% of our total assets, which speaks to our liquidity.

And as you can see on the next page, on page 27 as Frank mentioned earlier we have no long-term debt. We have strong liquidity. We have networking capital of $32.3 million and a current ratio of 9.2 to 1. And with that I would like to turn it back over to Frank.

Thank you, Catherine. Now we want to talk about the big picture. We've highlighted how we've done. Where our opportunities are. We've given you the strengths and weakness of the past and the opportunities for threats that we look at as running a business. We see the mutual fund business as a threat, is margin compression makes it very difficult to be competitive, to reinvest in the latest technology and hire the best brains. It is something that is for all of the investment companies, we feel that our operating margins are low just for the mutual fund business. We are addressing that. We are addressing several of those things that we feel is a threat.

However, big picture we feel that we will resolve all that part and continue to grow to reinvest in intellectual capital and technology necessary to remain competitive in driving Alpha. That is bottom-up. Top down, let's go for the case of emerging markets and natural resources why we remain so bullish.

Page 29, we're just happy the Wall Street Journal several years ago we came with a visual showing that growth, our theme has been that in 1970 there was only 3 billion people. Everyone was focused on the year 2000 or Y2K. But in fact more significant the world's population had doubled, but the lack of investing in food, processing in mining and oil and gas had not prepared for the doubling of the world's population and the urbanization. So this visual is very important. It is educating the masses for -- is still the most widely read publication in America is the Wall Street Journal and I thought they did a great job in articulating this. And we are happy to think that we are characterized by 1% of thought leaders in this space because we expressed this over three years ago.

The next page is page 30, why are we having a food crisis? Well one of the key factors is demand side. The lack of investing in the supply side as the population continues to grow is a key factor for all commodities. But just basically in 1970 these poor countries of China and India which had no global impact to date are significantly 40% of the world's population growing at almost 10% are consuming many more calories per day. We are seeing this out of Nigeria; they never consumed wheat and now they are big consumers of wheat with the oil revenue.

Page 31, copper demand. To satisfy demand the world may need to mine as much copper over the next 25 years as throughout history. This is a key theme for us, very early on this cycle we were very long copper gold deposits because we felt that it lowered the cost and demand for copper is going to continue. Any strike anywhere copper prices spike. If you take a look at 1/8 of the world's construction cranes today are in the Middle East. Well, if the temperatures there are over 100 degrees to 140 degrees, they need air-conditioning, and each air-conditioning unit has five pounds of copper. So you just think of that demand side, where is that copper going to come from.

All the new hybrid cars use twice the amount of copper; so car sales for the old SUVs may be down but the new hybrids are up. So we just continue to see a theme that says copper prices can run to in this cycle $8 a pound; just like years ago we said oil could hit $100 a barrel and we were laughed at.

Page 32 is very important as a visual. In 2001 it was estimated that 7 million -- 7.1 million tons of copper would be hitting the world today. And in fact only $1.3 million. So there is continuous delays and disappointments not in oil and gas, but in all commodities as the world's population has more than doubled since 1970.

Page 33 is our own sort of proprietary way of looking at the world. We track the E-7 countries economic activity versus the G-7, and we look at it versus oil. There is a high correlation of oil demand versus the economic activity of the seven most populated emerging economies.

The next page is 34, is showing copper. Copper demand is also highly correlated with the industrial production of the E-7 more so than the G-7. As this visual illustrates, this is what is driving this supercycle and why we are still remaining very, very bullish when we look at the policies of governments in these large populated countries.

Page 35 there has been a lot of talk that the exchanges and commodities are driving up the commodities. It is lots of speculation by pension fund groups, etc. and hedge funds, but when you take a look at the nonexchange traded metals versus the listed base metals, where you have alumina, cobalt, iron ore, ferrochrome, magnesium, etc., those price appreciations are even greater. So we are seeing this lack of investing in these resources as being a real driver whereas the global demand continues.

Page 36. We have used this visual before for the overall different sectors of the S&P 500 and different asset classes to show you the volatility. What is important in this visual is no one commodity stays at the top, year in year out as giving the best performance and seldom where a commodity stayed at the very bottom. There is this huge volatility like gas. Gas is either in the ceiling or it is in the basement in its volatility; and that is what we're trying to share with investors is that when you have the volatility of the dollar versus currencies and commodities are priced in the dollars you can add in amplitude to this volatility. And our job is to be able to capture the opportunities, looking at those commodities at the bottom of the trough, looking out a year to two years out, that is where the opportunities are, and as they rise to the top realizing gains and managing risk.

Next page is 37, is showing that emerging markets; it is important to recognize unlike the '90s today 70% of foreign exchange reserves in predominant US dollars are in the emerging markets. That is why we are seeing a shift in economic growth, and we are seeing a shift and ability for these emerging economies to invest in commodities.

The next page is 38 and showing you that the incomes are rising also for these economies. Take a look at 1990, what the average income in Brazil was, $3464 per person. Now it is $6500. Take a look at the Middle East. It is more than doubled. Take a look at China. It is up almost tenfold. Take a look at India, also it is up 300%. That is leading to a consumption demand within those countries. That is where the decoupling of America and you are seeing the smarter asset allocaters in the fund business saying we need a greater exposure to emerging markets and resources.

The next visual over here is showing there is still room to grow because the GDP per capita for the US and the EU is still far greater than China and India. The next visual, 39, is showing you capital expenditures. And if you go to the 2040, it is $40 trillion and if you go just this plan sort of China in the past for the next eight to five years they announced in January this year budgets of $1.5 trillion. Or let's go to 2017. It is $22 trillion.

So when you look at those economic policymakers looking to build up their economies to have the great infrastructure of America and the smartest brains in these countries went to American schools, they have gone back to these countries. As Thomas Friedman talks about in his look, The World Is Flat, this is a big driver for this infrastructure spending. I think it is -- I am not seeing where it is going to end. It is just going to have short-term volatility to it. What would be the driver, what would it be? It would be policies by governments to change the infrastructure spending.

One of the big questions right now is China and after the Olympics in Beijing, is that going to have a big impact? Will then the infrastructure spending stop dramatically? No. Beijing as a percentage of the overall GDP of China is not a key driver of China's economic activity. It was for Seoul as a percentage of Korea's economic activity half the economic activity of the country of Korea is through the city of Seoul. In America when we had the Atlanta Olympics and we had the L.A. Olympics, these cities do not dictate the GDP of the country, so the fact that using that model and looking at China, the same thing. So we don't see a huge drop in infrastructure spending.

The next page is page 40. It is the shift, the global shift due to commodities, and what is smarter this time is like the Middle East and these other countries, they are recycling their petrol dollars or their trade dollars back into infrastructure spending. We are also seeing different types of royalty; a trust basically being created from this oil revenue and other economic avenue that's going into sovereign funds. So you are seeing these sovereign funds go in to buy the commodities. When Mann Financial got into financial problems in the commodities, soft commodity market for corn, wheat etc. in March, the Chinese came in and bought $2 billion of their book of business and they are trading -- they are not dumping US dollars, they are basically taking their dollars and they are buying oil or they are buying these soft commodities because they have to feed their economy.

Take a look at the next visual is the huge growth in the foreign reserves of China, and when a lot of these foreign reserves are also coming from exporting to the EU.

Next page is showing China's year-over-year oil imports for March were up 16%. Page 42, it is important to recognize it just came out this week that India's March numbers were almost 10% on a year-over-year basis. That is why we have the strong demand for oil. China is also very concerned with the Olympics coming up that they will have enough oil to deal with the huge inflow of people coming in to watch the Olympics. So they are preparing for that. So I am very, very bullish; short-term we believe that oil can correct based on our quant models, however long-term oil remains very bullish.

Next page is 43, showing that China's basic domestic consumption is rising. 60% of the global production in 2007, it is 11% compound annual growth rate. Steel, that is why we saw iron ore prices go up 65% this year, coal prices have tripled. It is all for the demand in consumption in China.

The next page is 44, China is reaching a [parade] what is showing you exports, the US is less important today even though some publications in New York will continuously bash China and say that no, it is China is basically dumping all these products on America; while it is actually there is a shift taking place, its important for investors to see that. The next visual is highlighting that; vehicle sales are up 12.8%, personal computer sales are up 19.7%. And mobile phone sales are up 25%. That is all domestic consumption within China.

Next page is 46, case for Brazil, low inflation, middle-class growth which I highlighted to you earlier, sovereign debt raised to investment-grade and Buffett says this is the only country which he invested in as a currency play is the real.

The next page is the US; we are very bullish based on probability models going back over the past 50 years of [theater] points. There's an 80% probability the market is up 8% in election year and the governments will do everything as we saw with this panic taking place from liquidity crisis. We have witnessed $800 billion -- that is four times what Greenspan put in after 911 to the economy. The two-year treasury yields are above the Fed funds rate as a sign of improving economy and the export growth sector is booming. Steel exports are growing. GE is growing overseas. So I see a case for America that is bullish.

That ends the presentation, so we've given you the big picture. Now let's get into the Q&A.

Thank you, Frank. We have had some questions come in. For more questions just hit the button on your screen and you can still submit a question to us. I going to start with one for Catherine. Could you discuss the disconnects between the 14% year-over-year asset growth and the 12.5% decline in quarterly earnings? Catherine I know you touched on this in your presentation but because it is such an important point, if you could reiterate it again for us.

Right. At first blush there is a disconnect, but as Frank said, you need to look under the hood. And we indicated that we had a $900,000 swing in our corporate investment this quarter compared to same quarter last year. And most of that is from unrealized gains and losses on our corporate investments. That is not our core activity. As I mentioned before, we would have actually been 6% positive in revenue had we excluded those noncore operations.

Thank you. And from the same questioner is expense growth outpacing AUN growth and thereby cutting into earnings growth? If so, what strategies do you expect to employ to address this situation?

We do recognize that our expense growth is increasing and we are focusing on areas where we can control expenses in hopes that we can slow the increase in our expenses. We also recognize there is a lag between signing those agreements that Susan discussed earlier with Merrill, Morgan Stanley, LPL. It takes time to educate those investors and to gather assets flowing into our funds relative to those agreements. So we have to balance the two.

Thank you. Susan, a question for you. Why did platform fees grow faster than AUM? Do the platform fees vary with fund flows, or are they fixed in nature or some combination of both?

Platform fees do vary with fund flows. It is not a fixed number. And what we have seen in the industry is very indicative of what is going on at U.S. Global. As I mentioned earlier, 75% of flows are coming through some type of financial intermediaries and these financial intermediaries are typically investing through some type of a platform. So we are seeing more and more of our assets coming in through platforms.

We are also seeing the retail investor moving from investing directly with funds to investing through platforms. These platforms allow investors to aggregate and consolidate their holdings. And so it is easier for the investors, but it is expensive on our end.

Thank you, Susan. A question here, Frank was talking about gold in his, and resources. Can you give us some extra details on why gold is off 15% since March 1, and why oil is up 25% when they usually move together?

That's a great question, and we've asked this because let me explain to you the historical pattern. Is that the correlation between the gold trend and oil price is about 90% over long periods of time, five years rolling. And the inverse relationship to the dollar is -70. So basically you can determine that gold price action day in, day out is 80%; either the dollar is up or down or the price of gold -- or oil is up or down.

What has taken place is the IMF, the announcement the IMF is going to be selling and the Congress that basically the Democrats and their liberal position at the IMF has held gold to raise money. You saw which we were commenting and asking questions, that some people redeeming and positioning themselves for gold to decline so they can replace when the IMF starts to sell. Will that take place? We don't know. It historically takes place that you get this volatility going into May, June; and you get a bottom usually July, August and you get the big run which we highlighted in previous presentation the seasonality of gold.

Some historical patterns are, listen to other people feel that we are due for intermediate rally but more important to us is we are noticing and this is short-term noise, but the conserve between the bifurcation of small caps to big caps, that is something that has an impact in overall performance.

The other thing I want to comment just to talk about regarding what Catherine talked about, what we are trying to help with investors on this earnings is basically separate what our different types of sources of revenue. And a source of revenue earnings has come from these investments, which we inherited basically many years ago. They have been big winners for us. We are slowly selling them. But they do add to the volatility. And we saw the small cap stocks getting hammered this past quarter liquidity event, and that was a swing. So let's take that out of the picture and say how is our core business doing. And it is actually doing quite well in that context.

We add in these other investments which can help us greatly or can hurt us just like past quarter. That is just what the markets are dictating. But the core business is very robust, and we have to pay -- excuse me one second I am losing my voice I apologize -- I want to also make a comment with Susan is that in 1990 when I purchased this business and moved to Texas, basically according to strategic ICI numbers, Strategic Insights publishes that 1990, 23% of the mutual fund sales were direct to retail investors, and 77% were sales to third parties and to institutional investors.

Today it is now 11% directly to that retail investor and 89% is coming through these intermediaries and platforms. With all the regulatory rule making, with all the stuff, the aftermath of Spitzer, etc., the process, the legal process of getting on those platforms they take twice as long. They are twice as expensive, and when they finally get done you feel like you are half as happy because the fund flows are not there immediately. But that is just the reality that other fund groups, the larger fund groups already have those platforms in place. As a boutique we are just plugging away inch by inch, everything is a cinch is our motto, to get those things on site to basically embrace what is taken place I mentioned earlier, this there is a movement worldwide, and there is a movement in America. It is the home bias, away from the US dollar long-term trend, and having exposure to an emerging markets international funds is growing, and the growth in exposure to resources is growing. And we are industry leaders in those two categories.

Frank, thanks. Question here, you seem to have a high administration cost and the increase in performance-based bonuses seems unwarranted. Elaborate, please. Frank, if you could talk about that.

I am totally confused on the question, on the bonuses. We highlight to you that how many Lipper awards that we had and we highlight to you in this past quarter, out of 6000 some odd funds, our leadership. I also highlight to you that we won two awards for the best for five years and our salaries are low, and the bonuses for the investment team and pools and teams are basically predicated on the success. So when we are outperforming our peers for one year, three years and five years there has to be bonuses paid to investment team or they will leave. And that would turn around and create a down spiral. So I just think that you have to do more homework and take a look at how lean we are because you want to take a look at our returns on capital. And that is a real key driver when having margins that are lower, the peer group profit margin for mutual funds like the T. Rowe Price award are 30%. Our mutual funds run at less than 10%. So we are very lean machine, and so we have to have bonuses when we perform to keep them real high and keep the people focused and generating alpha.

The high admin, the administration fees have gone up predominantly with the cost of compliance, the cost of Sarbanes-Oxley. As we became more profitable our market size grew, our Sarbanes-Oxley costs go up. The regulatory world, it grows in double-digit rates. The rule making there and so we now have to have, we have four attorneys. The process of getting on these platforms, it is all attorney to attorney so you have to have it. And you outsource and it is going to cost you $1000 an hour for these 40 (inaudible) attorneys. In-house we run it at 1/5 that cost. So we think that we are very lean in driving that equation, but it is extremely expensive in a highly regulated world.

Thank you, Frank. The question, have commodity based ETFs distorted any markets, gold for example? How can our mutual funds educate the public that professional management makes more sense than speculating through ETFs?

One of the regulatory aftermath of after-hours trading became an overkill, and then couple that with money laundering rules made the mutual fund industry as a whole very, very stringent on people and the liquidity of money flows. So you saw investors turn around and say liquidity is very important to them, they want to be able to get in and out of a mutual fund when they feel and that migration has gone to ETFs. So that has been the biggest competition is that liquidity of ETFs.

You look at money management, 50% of money management is picking the right sector. 50% of the other alpha comes from the good stock picking. So you need that combination of being in the right sector whereas a lot of these ETFs are basically saying we don't have to worry about stock picking. We are just going to focus on the ETFs and because liquidity is a key driver, people are doing that. We're doing as much as possible in educating with our webcast. We do more webcasts than our peer groups that are substantially bigger than us at educating drivers of the marketplace, big picture and down and sort of picking stocks and looking bottom-up.

But ETFs are a very competitive asset for mutual funds. And mutual funds we -- I heard this wonderful expression is called the tracking error police that are out there, that mutual funds have been beaten up as money managers. That you just have to track and index and the idea of taking risk to outperform an index is very, very difficult. So why would you want to buy an active money manager that is more consumed with tracking an index than you can go buy an ETF and you have instant liquidity. So I think that that is going to be a factor.

We are very caught up with our culture, that our fees and everything we do is aligned with the shareholders. One of the things we do on our portfolio team is that half their bonuses go into the portfolios. And those bonuses are aligned, and they can't trade or take them out. The have to stay long-term and move with the shareholders. And I believe that is a very key factor in our culture. So we will do ongoing educating investors on the differences between our tracking error, in quasi indexes, active money managers and ETFs.

Okay, thank you. Question for Susan. On your new distribution agreements what levels of inflows are you getting through these new relationships?

These agreements are very, very new. And we have not had the opportunity to actively sell our market to these new financial advisers. So needless to say the traction, the significant traction is not yet there. It does take time to filtrate these funds, and our information down to these platforms. So we will not be expecting significant inflows for a while.

Final question for today, for Frank, it was interesting what you were saying about market factors affecting GROW and small caps being beaten down. In the past you talked about GROW being hurt by malicious short sellers. Do you still see that as being the case, and what can be done about it?

We call them rogue hedge fund managers. And the famous Jim Cramer talked about a year ago they used to be part of that group where they basically collude together; the head of the FCC has commented about this collusion. There is a New York Times story at the end of April talking about some companies deserve to be shorted. There are hedge fund models, quant models that go short to highest PE ratio stocks along the lowest PE ratio stocks, etc. There is a concern that in the past quarter that those shorting were up 7%, and their profits were as the S&P was down.

The real concern to us is when people spread malicious allegations we have seen this on Yahoo, these chat lines where they are called tromes or trolls or whatever but the same person with two different names, talking back and forth trying to talk down a stock. Spread rumors; and that is what the SEC is after. Will they come on with full force? We don't know. The best part is just to educate. There are so many great hedge fund managers out there. It is sad that you have a small percentage that go out there that try to do stock manipulation; the rules make it very easy. If you can't rise, lifting a stock at the end of the day creates a lot of concern that you are trying to manipulate stock prices. But knocking a stock down the last minute of the day, that is okay and the no uptick rule, that is basically favors that.

So I think there are some teething issues here. What has concerned us is the failed deliveries. When we used to get a call from NASDAQ there is a spike in failed deliveries, that means that people are illegally shorting the stock. We see these high short positions, and we also find that the brokers are contacting people to be able to pull the stock when the floor rate is 30%. Our only suggestion to investors is do not let brokers margin your stock, because they are making a lot more money than you are, and they are loaning it out for 20% to 30%, put it in a segregated account and stop the securities lending against the position is the best advice I can share with you.

We have been warned that if you highlight this and a discussion like this right now, that they all talk to each other and they basically put a bigger swarm of wolves to go ahead and try to knock you down. So with that, we don't want to belabor it, we just want to stick to our stitching and that is focus on fund performance which basically says focus on our investment processes, our team approach and look for those companies that have the highest returns and capital, the strongest growth in earnings and cash flow and revenue.

Okay, great. Thank you. Thank you, Frank, and thank you everyone who submitted questions and those of you who are listening in. This concludes U.S. Global Investors earnings webcast for the third quarter of fiscal year 2008. This presentation will be available for replay on our website, www.USfunds.com. And again, thank you all for your participation today. Operator.

Thank you, ladies and gentlemen. This does conclude our teleconference. Thank you for your participation.