US Global Investors Inc (GROW) 2010 Q4 法說會逐字稿

(audio in progress) There will be a question-and-answer session as part of today's presentation. (Operator Instructions). So now let's go to Frank Holmes, CEO and CIO, for an overview of the fiscal year and the latest quarter. Frank?

Thank you, Terry. Let's quickly look at GROW, basically how we look at GROW and the strengths. It is a go-to stock for exposure to emerging markets and resources. I'm going to walk through later in this presentation the sensitivity of the stock price to the markets and emerging markets and assets, which is making it a much more go-to stock.

We are debt-free. We are proud of that, strong balance sheet with reflexive cost structure. We own our own building and we have recently done analysis that for our space would cost a lot more money, G&A costs if we had to lease for our space. So we're very happy as we weather through the economic volatility. And the monthly dividend and return on equity discipline, it's not going away.

So let's hop to slide number five and you can take a look at revenue. You can see that revenue improved on a year-over-year basis 2009 to 2010. It's up substantially and net income improved dramatically along with earnings per share, which is basically a $0.50 swing and shows you that to what our capacity is to a sustainable run in markets, our earnings power.

Next, page six, is an overview. If you are looking year-over-year and the financial snapshot and what you see here is once again for the quarter, revenue increased. Also net income is basically flat during this period and earnings per share remained flat. In fact, we are really happy because I'm going to walk you through and show you that from April 16 until -- for that quarter, how much financials took it in the chin and how much overall emerging markets and capital markets as a whole declined during that period and it shows our sensitivity to that. Vice versa, tremendous sensitivity in the upside.

Next is taking a look at sequential quarters; that impacted as you can see our earnings per share from January to March was $0.10 and then until June during this change in market conditions, we declined in our earnings. But what we are really happy with is that our capacity to adapt and adjust to those market forces.

Next is a visual showing you assets under management. They have improved on a year-over-year basis from 2009 year-end to 2010. We seemed to have stabilized at these levels and as I will also go in this presentation, it's a non-event in the normal standard deviation moves for our asset base to go plus or minus 40% over 12 months. So that is an inherent part of the emerging markets and resources. They basically have a greater volatility, which does impact our overall asset base.

What we like to show you on the next visual is the peer comparison of assets under management growth. Our peers are more diversified and U.S. Global has a much greater concentration in equity funds and a greater concentration in resource and emerging markets.

The next visual is looking at peer group comparison earnings and what you see there's always this overlap because most of our peers have a year-end December 31 which is the calendar and ours is June 30, so we were trying to give you sort of still this snapshot to help you with seeing that what our peers did and basically we remained flat. Peer comparisons return equity over the one year. We outperformed our peers and I really share with investors that our peers have a leveraged balance sheet. And so in a rebound in markets, one would expect that they would have a higher return in equity but we definitely show that our cost structure remains lean. And so that's a key focus of how we think about in running our business.

Peer group comparisons, the next visual that relates to that and it goes to show that we have zero long-term debt. Our peers have 28%, major banks 67%.

The next visual is a comment on the S&P financials versus the S&P and what we saw from April 16 until basically it's going into August, is a huge decline. The S&P was down 13% but the S&P financials, the component which was the biggest sector of the S&P 500, was down 20%. And this had a more significant pack on small-cap stocks. Resources or non-resources, it really didn't matter. They took -- it was much more difficult in that volatility factor in the down stroke.

The next visual is showing you the Russell 2000, the domino effect and the psychology of it. What really took place is that a big impact we saw in sentiment and clearly going after a Goldman Sachs is an issue that the regulatory body has got to make sure they keep Wall Street as functional and clean as possible. But the following week was a huge move by Obama to aggressively challenge Wall Street to stand with America's families. The orchestration of the Service Employees International Union, statements they made is just really create a negative sentiment. It's a negative sentiment right across the country and we are seeing that with negative money flows. It really doesn't matter if you're the number one fund in a sector.

Basically the fund group that is having the positive fund flows is PIMCO and there's this flow of -- it's basically deleveraging risk of buying bonds. And it's really quite shocking to take a look at ten-year in five-year bonds and some people are talking about 30-year bonds going to 3% in the battle for deflation. But it's really investors flocking -- leaving the capital markets where the biggest returns and capital are available as they deleverage this risk.

And I think that this sort of negative continuous attack on vilifying all CEOs across the country in a broad brush and vilifying Wall Street in a broad brush creates an impact in capital markets and sentiment which then shows up in money flows, which can impact our assets as money managers. But that will -- things come and go and there's ways with these factors, but just tries to explain what took place.

I would like to turn it over to now Susan McGee for significant events for the past year.

Thank you, Frank. Good morning. We had a number of significant items during the fiscal year. On March 1, we introduced institutional share classes. We have three of our equity funds. Those funds that now have the institutional shares are the World Precious Minerals Fund, which invests primarily in junior and midtier gold and precious metals exploration companies; the Global Resources Fund, which invests in energy and natural resources equities; and the Global MegaTrends Fund, whose strategy is to invest in equities benefiting from the dramatic increase in infrastructure development around the world.

Institutions are increasingly viewing natural resources and precious metals as an important part of a diversified portfolio and institutions are a growing component of our asset base here. It was important for us to recognize that they have their own business needs and our new institutional shares are responsive to those needs.

During the last fiscal year, our institutional assets under management grew roughly 22%. It stood at around $630 million as of June 30. Our assets under -- are coming to us through the Schwab institutional channel. We are up about 54% for the 12-month period and our AUM coming in through the Fidelity platform was up 37%.

U.S. Global has historically been a retail mutual fund company but the institutional gains are important because these investors tend to control larger pools of assets and they make their decisions based not only on performance but also on other factors such as investment process, quality of management, etc.

U.S. Global and the fund trustees agreed to contractual expense caps on our equity funds for a one-year period that ended September 30, 2009, and beginning with the second quarter of fiscal year 2010, we replaced these contractual expense caps as voluntary caps on the equity funds. The voluntary caps were set roughly 25% higher than the previous contractual caps. The caps on our muni bond and our money market funds also became voluntary.

Early in the fiscal year, we also implemented a performance fee structure for the nine U.S. Global equity funds. If a fund outperforms its benchmark by 5 or more percentage points over a rolling one-year period, the advisor receives a 25 basis point performance fee. But if the fund underperforms its benchmark by 5 for more percentage points, the advisor forgoes 25 basis points of its management team.

The Advisor Board of Directors has approved payment of a $0.02 per share monthly dividend for the fourth calendar quarter of 2010. As Frank has mentioned, we have had our stock dividend program in since June of 2007. Each quarter the dividend policy is reviewed by the Board of Directors and it determines whether to continue the policy for the next three-month period. A variety of factors go into that decision including the Company's financial performance, operations, capital requirements, and other factors.

U.S. Global went through a website redesign in the past fiscal year and you can see on the slide how the new website looks. It is more visually compelling and easier to navigate than the older one. The website is our most important communications tool with both fund shareholders and GROW shareholders, so we want it to be as user-friendly as possible.

Our marketing, design, and IT teams put a great deal of effort into the process. One of the things that I would like to highlight on the website is the upper right. That's where we have interactive content like quizzes and maps. We currently have a gold quiz, an energy quiz, and also now a quiz on the flags of the G-20 nations. As global investors in emerging markets, the flag quiz is relevant. So we urge you to give it a try as well.

And the next slide shows a couple more of our key communication tools, The Weekly Investor Alert and its companion, The Weekly Advisor Alert, go out every Friday afternoon to more than 40,000 individual investors, advisors, and others who are interested in hearing our thoughts on markets and U.S. Global's key investment sectors. Most weeks there is a special commentary from Frank which is republished on many high-traffic investor websites also.

The same holds true for the Frank Talk blog, which is updated almost daily with various educational material related to our investment sectors. Yesterday's update was on key factors driving economic growth in Russia which is of course relevant to us in the context of our Eastern European fund.

And now let's go to Catherine for more details on the financials.

Okay, thank you, Susan. Good morning. Earlier Frank touched on some quarterly and annual financial results and I would like to expand on those results of operations for the fiscal year ended June 30. And beginning with revenues on page 18, we recorded a total of $35 million for the year, up 51% from the $23 million we reported last year.

And to break down those main components starting with advisory fees, we saw an increase of 22% to $21 million, largely due to an increase in our higher-margin natural resource fund. Secondly, distribution and admin fees combined increased by $3 million to $7 million, primarily due to a full year being recorded this year versus nine months last year when those fees were implemented. In addition, investment income, we recorded investment income of $979,000 this year compared to a loss of $4.6 million in the prior year. We had a modest rebound in the market value of our trading securities and in the prior year, investment income was adversely impacted by other than temporary impairment charges.

Moving onto page 19, our total expenses for the year were approximately $26.5 million, a slight decrease of 1% from the prior year. And to break down those primary pieces, starting with sub-advisory fee expense, we had a decline of 77% to $1.9 million as a result of a change in the sub-advisory contract in fiscal 2009. General and administrative expenses declined by $1.8 billion or 21% primarily due to a prior year proxy related cost associated with the merger of the two trusts. And somewhat offsetting these decreases in expenses, employee compensation and benefits increased by 19% or $1.9 million primarily due to higher performance based bonuses.

And next we can go to page 20 which shows net income for the year of $5.3 million or $0.35 per share compared to a loss of $0.15 per share in the prior year. As Frank mentioned, that's a $0.50 swing and a 339% increase.

Next on page 21, we show the quarterly earnings breakdown. This year was relatively stable compared with last year. As Frank described, we did have a slight dip in earnings in the fourth quarter which impacted our top line. That has subsequently started to come back.

On page 22 is our balance sheet. Our cash and cash equivalents increased by $3.5 million over the prior year, so we are cash flowing positive. Cash and marketable securities combined make up about 78% of our total assets, so we are highly liquid.

And as you can see on the next page, we still have no long-term debt and the Company has networking capital of over $28 million and a current ratio of 6.9 to 1.

With that, I would turn it back over to Frank.

Thank you, Catherine. Dominique Moisi wrote a book called The Geopolitics of Emotions and what he noticed is that countries that have policies that are for hope, even if they are very poor -- like India -- you have a sustainable growth. When policies are out of fear, then you have a contraction. And that is something that it doesn't matter what political party is in power, it is the capacity to articulate policies for peace and prosperity, which generate hope, which is very important for sentiment, for people investing, for people spending, for people feeling that there's upside potential for them.

And I think that -- I hoped in this presentation to walk you through what I see around the world as hopeful and what's positive and I hope that the policies for going after just Wall Street is very dangerous. We need great refereeing like we do with sports but to vilify all the athletes is fundamentally flawed. I don't see a cap on salaries for entertainers. I don't see a cap on movie stars and I don't see a cap on pro athletes. So trying to go after all CEOs and Wall Street Journal -- Wall Street as a whole creates something that's not as constructive and positive.

But what investors have to realize is that this is all part of 400 years of research that every decade, there is a crisis that happens and these type of crises take 16 quarters to resolve themselves, based on research.

A recession that is induced by just rising interest rates lasts four quarters. A recession that is induced because of over debt and deleveraging, etc. takes about 16 quarters and we are more than halfway through it. But what it does do is it creates tremendous volatility and it creates a lot of uncertainty. What we have to do is just to stay as positive and constructive in the marketplace because there will be lots of opportunities.

And so let's just take a look at what's taking place in the capital markets. There's no bubble in gold, 25. If you take a look at what took place in the tech boom or you take a look at the previous cycle in gold, gold has been growing up very -- on a very gradual basis over the past decade, not on inflation but as the next visual shows you, on a deflationary cycle. And whenever you have currency instability due to big inflation or big deflation, gold starts to perform as sound money.

It doesn't mean you convert everything to gold, but what you're seeing now around the world is like today Bangladesh, a poor nation, where the average GDP per capita is like $100 a month. And here you have a country because they are making shirts that we are buying in stores are seeing that they are taking dollars and they are taking euros that they want to diversify and they want to have some gold just like the Federal Reserve has gold as part of their foreign exchange reserves.

So I think it's important to recognize that we're going to wrestle with this deflation I think for another five years. With that, there will be policies of trying to create jobs, there will be competitive valuations of currencies, and that will make gold an attractive asset class. Is gold going to go and double and triple in a short period of time? I don't believe so. It's just a very gradual process and what you are seeing on page 27 is that even with low inflation, gold rises to all-time highs.

And the next visual is 28 looking back at studies that show you that whenever you have low real interest rates, it fuels price performance and commodities in particular gold and silver. What we saw in this past quarter is 30-year rates, 10-year rates, five-year interest rates making all-time lows. And I think that that only lends itself well for gold as being an important asset class.

When you only earn basis points on a money market fund and you are only earning on a two-year note 60 basis points, the cost of owning gold is very, very little. So if you had going back like we take a look at 1997 where interest rates were substantially higher and above the inflationary rate and we had a surplus budget, then gold was an unattractive asset class. This has all changed.

As you see on page 29, is the gross financial liabilities as a percentage of nominal GDP projected for 2011 and look at Japan and look at Greece. Japan has a much more higher savings rates and they're able to protect themselves in a much stronger tight knit economy than Greece. But the debt levels of these countries is just too great. And when you take a look at China, as you can see, the debt levels are extremely low and India is much lower than Greece.

And what is interesting with India is that it also an economy that has high consumer spending but is very internal and their growth has been coming because of exports but I think the other factor is that they are very strong internally with consumer demand and they are growing at a very rapid rate. But the individuals, they have low debt relative to what the governments are, which I find most interesting because in these emerging countries, over 94% of all cell phones are prepaid every month. 25% of homes have mortgages on them.

And so when you look at 50% of world's population, it has as you can see on page 30, it has a very clean balance sheet. And what we're seeing is that the advanced G-20 countries -- and I do recommend that you go to visit the website as Susan commented and test your skills on the G-20 game to see how fast you can line up the map with the country for the G-20 -- but what you are seeing is that most of them are in the danger zone of what percentage of their debt is to their GDP whereas emerging countries have taken it on the chin.

In the 1980s, it was Latin America. In the 1990s, it was Asia and Russia and you take a look at the crisis in China and outside of China, not China in particular but Thailand and countries such as Indonesia, back in 1997, they didn't bottom until 2001, 16 quarters later. Russia imploded in 1998. It didn't bottom until 2002. So we're just going through this process where the growth and opportunities are these emerging countries.

The next visuals to give you is to compare the E-7 to G-7. In our macro models, we like to compare the G-7 and what's important here to take a look at what percentage of the 2010 GDP is debt and what the increase has been. And as you can see when you compare to page 32, the E-7 countries is -- which is basically the seven most populated countries in the world, they are 50% of the world's population, but only 15% of the world's GDP, whereas the G-7 are only 15%, approximately 15% of the world's population but 50% of the GDP.

What you see is the debt loads on the most populated part of the world is substantially less. So that gives them more flexibility for growth and that creates a demand for many products that we can export high precision medical equipment, technology, and the demand for resources remains strong.

So this switch in debt loads and populations very important to look at and it shows up in page 33, that gold is rising in many currencies as the world wrestles with deflation.

Page 34 shows that gold has performed well with low volatility over the past 10 years and this drives pension funds all of a sudden to diversify into gold as an attractive asset class, whereas 10 years ago, it was heresy in the financial markets for pension funds and institutions to look at gold to diversify with.

But what you are seeing that is important in that equation is that not only has gold outperformed, is that its volatility is less in the S&P 500, so it shows the prudence of diversifying and owning gold.

And the next visuals to show you, what we are in right now is a seasonal pattern, it's not 100% will take place but there's a high probability that gold rallies in September going into December. And that is predominately driven by the next visual is emotions of the heart. Emotions of the heart from religion to marriage to giving, basically drives gift giving. And the bulk of demand for gold is jewelry demand and the bulk of that is a cultural affinity in Asia, where I showed you earlier that their GDP debt ratios are much more attractive and rising incomes.

So any time gold has a correction, we see demand picking up out of Asia. And so right now, Ramadan ended last night and then we're getting ready for a wedding season and then the big season of Lights, the Diwali season in India usually is big gold demand. And Christmas, and then we have the Chinese New Year.

Be that as it may, we like to look at cycles. It's important that it's not just cycles as price takers for gold. It's the price makers, it's the investment world, seeing countries this time last year like India all of a sudden buying the IMF gold and poor countries like Bangladesh who are relying on exports to drive their economy are diversifying into gold. This is an ongoing theme that is important and the dynamics of gold being accepted as an attractive asset class.

We still advocate to shareholders that investors that you don't run out to buy gold to get rich, but you have a 5% to 10% weighting and you rebalance each year to catch the volatility. You don't chase it. Because on page 37 is -- we published on this many times is anticipate before you participate. Investors must understand the volatility. GROW has huge volatility because most of our underlying asset base which generates our revenue, they have high volatility and it's supply and demand factors that drive that volatility along with currency volatility because the US dollar, most commodities are priced in US dollars, if the dollar is weak, it can have an impact on commodities pricing and vice versa.

But what is important here is that the gold markets, equity markets have a 42% volatility whereas bullion is only 14%. So it's historically gold stocks, unhedged gold stocks have been close to 3 to 1 to the volatility of bullion. And as you can see that the S&P is just under 20%. It is now more than bullion but it is a lot less than gold stocks.

And emerging markets are 33% basically. It's a nonevent for them to rise 33%. And our underlying ability to generate revenue from that asset base is very sensitive to these markets.

And so the next visual basically is another statement of hope and statement of emerging market oil demand is driving growth demand. And what we are seeing in 2010 besides the influence of China, which has been very strong, it has also been Latin America. The prosperity that has taken place in countries like Colombia is also creating huge demand for oil in those countries and I see that this demand is growing faster than oil is coming, new discoveries or production will be able to come on stream. The setback in the Gulf will have a big impact in jobs in Houston. It will have big impact on production coming out in the future over the next five years coming out of the Gulf. So I think that it bodes well that demand for oil will remain strong. The cost structure for oil keeps rising, so I think that that's an important part of the supply factor.

China as you can see this visual, it remains -- their annual averages continue to grow and there's a great visual showing that -- talk about a traffic jam. If you think you have a traffic jams in some cities in America, China had one for six days. They build highways and basically don't have enough paths to get off the highways if there's a breakdown. And it goes to show as fast as you build those highways, you start seeing cars go on them.

And the growth and success of General Motors, a big part of that is the success in China. They are selling more cars in China than they are selling in America and this is all very positive for companies like GM. It sets up the demand cycle for oil looks still robust and strong.

What we are seeing on the next visual in 40 is China's metal demand is stabilizing and we are coming out with policies next month in China which we expect will be very constructive and positive for the continuing infrastructure spending and which puts an increasing demand for base metals.

Now we're seeing here a big shift from the coastal states and the coastal provinces where in 1978, Deng Xiaoping to stimulate this came with tax-free zones and now we are seeing tax-free zones in the interior and you are seeing that job costs are a lot less and you are seeing all of a sudden a construction boom taking place in the interior. This is very bullish for China. This is very bullish for all the commodities.

The last visual is Russia, which relates to our Eastern European Fund. As you can see that most of their foreign exchange comes from exporting oil and gas and other metals, but the growth domestically is robust and strong. Thank you.

Great. Thank you, Frank, Susan, Catherine for your parts of the presentation today. We did announce that there would be questions. We are not seeing any questions, so I take that as a positive sign that your questions are being answered in the context of the webcast itself. With that --

I would like to make some comment.

Go ahead and wind up.

Another comment I would like to make is that not only is the backdrop of the negative sentiment on financials and the financial regulation that took place that had a domino effect I mentioned earlier, during that period in the last week of May that if your market cap falls below a specific number that automatically you are pushed out of the Russell 2000. And that had an impact on the stock as particular one institutional investor was liquidating and that taking place at that period took us out of the Russell 2000.

What is positive -- what is negative about that is how it took place. But what's positive is that we are seeing many new institutional investors coming in and buying U.S. Global GROW as -- for its dividend, as a value investor, and the capacity to perform as markets turn on the upside. So that is giving us a broader number of shareholders from a concentration of one or two shareholders on the institutional end. So I remain very positive about development.

Okay. Great. Actually, Frank, while you were doing that, we did have a question pop in and you've covered part of it in your presentation, but I will read it anyway. The question is about a drop in assets under management from the third fiscal quarter to the fourth fiscal quarter. And I believe you addressed that in the -- when you were talking about how markets themselves went down in the Russell 2000, but that may be worth addressing again. And also for the caller, the $2.5 billion in AUM does include both retail and institutional. I will answer that one myself.

Well, it's -- the industry as a whole is seeing net redemptions. And it accelerated after tax payments, April 15, with financial regulation. I think it wasn't so much -- it looks like it was going after one particular firm on Wall Street which we need good refereeing and I think it's really important, but it was the broad blanket painting of all financial people as being bad and blamed for it and that vilifying. And that does have an impact and sentiment as investors as a whole across all asset classes are redeeming. And it doesn't matter if you are the number one fund.

The fund flows that you are seeing that are consistent with our peers is those that have 401(k) where money is coming in every month and that's driving at a sort of an investment process. But I think that we need just some more hope, hope and policies for job creation. And we will see a change in the direction of those flows for the industry.

We are impacted by it and we have a very flexible model of how we have run our business, and we adapt to that. We are increasing our exposure. We've made changes in institutional, what we are doing in marketing to attract assets, and we will continue that end of it because we truly believe that these emerging markets and the demand for resources, this is not going to change. And it's very different than 1971 when gold became unleashed and became a dominant asset class because Chindia, China and India, had no global footprint back in 19 -- in the '70s. Today they do and so we remain bullish on the big picture.

Okay, great. With that, seeing no further questions, we will wrap up here. This concludes U.S. Global Investors earnings webcast for the fourth quarter and fiscal year 2010. This presentation will soon be available for replay on our website, that's www.USfunds.com. Thanks, everyone, for tuning in today. Operator?

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great weekend, everyone.