US Global Investors Inc (GROW) 2011 Q3 法說會逐字稿

Welcome to the US Global Investors exclusive webcast, US Global Investors earnings announcement for the third quarter of fiscal year 2011. Please note that the slides you see on your screen are controlled by the presenters. Also you may print a pdf of today's slides at any time by clicking on download presentation in the resources section in the lower left corner of your screen.

We would like to begin by introducing Ryan George, Investor Relations at US Global Investors. Mr. George?

Thank you. Welcome, everyone, to our webcast announcing results for the three months ended March 31st, 2011. The presenters for today's program are Frank Holmes, US 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 10Q 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 US Global Investors accepts no obligation to update them in the future.

If you have a question for us, you can submit it at anytime during the webcast. Simply type your question in the dialogue box at the bottom of the screen and click submit. If we aren't able to answer your question during the live presentation, we will follow up with you individually later on.

Let's go to Frank Holmes, CEO and CIO, for an overview of the quarter. Frank?

Thank you, Ryan. Good morning, everyone. Grow strengths go-to stock for exposure to emerging markets and resources, and this is clearly reflected in our performance this past quarter. Topline growth in revenue and a bit of margin expansion, and so that's just really key when you take a look at the rise in resources in emerging markets.

I would like to remind everyone we're debt free. We have a very robust balance sheet with a very reflexive cost structure. And Mark is correct, our system does not have a fixed high G&A. And monthly dividend and return on equity discipline, that's the key factor we focus on is beating our peers and returns on capital over a three-year period and being in a healthy position to pay out monthly dividends to all our shareholders.

Page 5 I'd like to jump to just to give you a financial snapshot. The year-over-year we're very happy to see income rising along with the revenue and the earnings per share rising, and it just goes to show the intellectual leverage that we have at our shop not with borrowing to get leverage, and those earnings up 70%. So in rising emerging markets and resource sector we can, in fact, offer investors a domestic exposure to these global investments.

Take a look at the next visual. Sequential quarters of financial snapshot, once again you can see what the growth is, and Catherine is going to go in more detail on the numbers. Average assets since '09 have just nicely grown, $1.9 billion, $2.63 billion and $3.1 billion, and that's a process that we're focused on. And Susan will talk a bit more on some of the strategy we've been working on of hiring some also intellectual capital, skillsets that are key for building our institutional drive both domestically and globally.

Peer comparison, as you can see in earnings on the next visual, our net income was up 83%. Earning per share is 70%. Our industry peers are also very healthy. They were up 27% and 30%, but our numbers can show this explosiveness in rising markets.

Peer comparisons which is key for my sort of understanding of capital markets, long-term highest returns on capital are usually those stocks that have the best performers. Accepting how we look at (inaudible) stocks in our funds and we look for the value drivers for high returns and capital. And what we're seeing here is the one-year returns on capital are modestly above our peers. The three-year is climbing, and that to us is key.

The next visual I think is very important, especially when you get the financial risk taking off, as we've just recently seen for the past week or so. But we don't have debt, and the major banks have to manage this, the substantial portion of their balance sheet's debt, and many of the asset management companies, they too also have a fair amount of debt. We had to rely on our wits and our intellectual capital to get these numbers and not to leverage our balance sheet.

When we take a look at the dividends, I always like to think this is a key factor on relative valuations, and our dividend yield is higher than our peers. It's consistently been higher than our peers, and it's higher than most emerging markets and resource stocks unless you to go to Royalty Trust in the energy space, but as a whole it's an attractive yield and gives you this exposure to emerging markets and resources.

The last visual I'm going to talk about before turning it over to Catherine Rademacher, our CFO, is price to earnings ratios. Our PE is 20.8 times and our peers are 21, so I think that when you take a look at dividend yield, you take a look at the explosiveness that we had the opportunity that our PE should be actually higher than what the peers are. I'm going to walk through at the end of this presentation, which I think is a very compelling story of why that we are still in the sector of bull market and resources even though they're so quick to be negative, talking heads on television, totally ignoring what's taking place around the world in emerging countries, and I'll give you a flavor for how we're going to participate in that.

Now, income state analysis by Catherine Rademacher, our CFO.

Thanks, Frank. Good morning. I'd just like to summarize our results of operation for the quarter ended March 31st, 2011. And beginning on Page 14 with revenues, we recorded a total of $11.4 million for the quarter. That's up $2 million or 22% from the corresponding quarter last year. And the main factors in the $2 million increase in revenues were first our mutual fund advisory fees, which are comprised of both management and performance fees, increased by $1.8 million or 32%. And of that increase, management fees contributed $1.2 million. That's primarily as a result of appreciation in the natural resource related holdings of the funds while our mutual fund performance fees contributed $660,000 to that increase.

And just a reminder that performance fees are paid on the equity funds when we -- that we advise when there is a performance difference of 5% or more between a fund's performance and that of its designated benchmark index over the prior rolling 12 months.

And the second contribution to the change in revenue was distribution fees which also increased by $292,000 as a result of increased assets under management. And slightly offsetting those increases to revenue, investment income declined by $200,000 due to lower unrealized gains on trading securities. We still had gains but they were lower than the comparable period.

Next on Page 15, our total expenses for the quarter were $7.4 million. That's up 4% from the same quarter last year. And the main factors of that increase were platform fees which increased by $294,000 or 21% as a result of increased assets under management. Also advertising increased by $243,000, 73%, as a result of increased sales and marketing activities. And again somewhat offsetting these expense increases, employee compensation and benefits declined by $276,000 or 8% as a result of lower performance-based bonuses.

Next we can go to Page 16 which shows a 70% increase in earnings per share of $0.17, as Frank mentioned, compared to $0.10 per share in the corresponding quarter last year. And just wanted to note also that sequentially our earnings per share increased 13% from $0.15 in the December quarter to the $0.17 in March.

And finally on Pages 17 and 18 we have the balance sheet, and at quarter end we had strong networking capital of $31.6 million, current ratio of 6.7 to 1.

And with that I'd like to turn it over to our President and General Counsel, Susan McGee.

Thank you, Catherine. Good morning. I'd like to note a few things that happened during the quarter. Our long-term performance of several of our funds was recently recognized by major publications including the Wall Street Journal, Barron's and USA Today. Four of US Global's emerging markets and natural resources oriented funds ranked among the top 25 in the entire mutual fund and ETF Universe for the 10-year period as of March 31, 2011.

Two funds ranked in the top ten, the World Precious Minerals fund and the Gold and Precious Metal fund ranking fourth and seventh respectively. The Eastern European fund ranked 24th, and the Global Resources fund ranked 25th. The long-term performance of these funds is a testament to the shift that's taken place over the past decade of global growth has shifted to the emerging world. Frank will go into a further detailed discussion of this transition in a moment, but we are very proud of our investment team and the hard work that they've put in traveling around the world seeking opportunities for our shareholders.

We also wanted to update you on our developments with our institutional efforts. We've seen a shift in the mutual fund industry over the past few years as investors have increasingly gone to Registered Investment Advisors for financial advice. Today these RIAs manage a combined $2 trillion in assets, so accordingly we've focused our strategy to tap into this fast-growing marketplace, and we've attracted veteran Keith Carlson out of early retirement to lead this charge. Keith is the former President of Van Eck Global and his impressive credentials include more than 25 years of operational and strategic management experience.

Keith is a CPA with expertise in the markets that we deal in, natural resources and emerging market investment, and he has a proven track record in building investment businesses. Keith joined forces with US Global several months ago and we're already seeing the benefits of his leadership -- that his leadership brings to our team.

During the last quarter our institutional assets under management grew nearly 15%, and now they stand at just over $1 billion as of the end of March. Our institutional assets coming through the Schwab channel were up almost 8% during the quarter, and our assets through the Fidelity platform were up nearly 9%.

Once again the advisor's Board of Directors have approved payment of a $0.02 per share monthly dividend for the second calendar quarter of 2011. We've had our stock dividend program in place since June of 2007, and each quarter this dividend policy is reviewed by the Board and it determines whether to continue that policy for the next three-month period. A variety of factors go into that decision including the Company's financial performance, operations and capital requirements.

And lastly I'd like to highlight some of our successful marketing and education efforts. The firm has received 21 awards for excellence in education since 2007, including awards that we've received for our weekly investor and advisor alerts and Frank Holmes' blog, Frank Talk, and the Shareholder Report magazine. I invite you to visit our website and join the other approximately 40,000 people who received the investor alert or research some of our other great resources and educational tools that we have there. Education does play a very big role in our communication with shareholders. One of our core company values is to be curious to learn and improve, and we are urging both our employees and our investors to use these tools to explore the world that we invest in.

And now I'd like to turn it back to Frank to give an update on gold and global markets.

Thank you, Susan. I'm really proud of the team and winning so many awards in the past decade in fund performance -- 28 Lipper awards, 21 marketing educational awards -- so it's a two-prong branding and positioning of the Company not only to educate and inform what the super cycle is, at the same time to go and deliver performance.

We are seeing competition come in from ETFs and the flow going into sector funds. Even though there's lots of risks, the only risks that came out recently were some of these inverse floaters that are super leveraged ones that did not deliver what was expected. And some of the ECNs were gas, natural gas, and they did not deliver what people expected.

But there's a lot of tracking here with these sector funds and country funds, and we think that eventually that will come out. And when we analyze many of these sector funds that's attracting capital for country specific or emerging markets or resources, gold funds, etc., what we notice is a lot of those stocks wouldn't meet our models. So we think over time if active money management, as long as it's outperforming these ETFs, it's key to be a great stock picker.

And our team to do that has to travel around the world because I'm a big believer in both explicit and tacit knowledge, and tacit knowledge is the feelings element, the feelings of our country, the feelings of the food, the culture, the people, at the same time the facts. And then integration is our mosaic of facts and feelings.

And just this past month I did do a trip all around the world to Singapore, to Thailand, to London, to Zurich. I spoke at conferences and then I looked at massive, massive iron ore deposits in Southern Ukraine. Went to Kiev and then Stockholm and then went to Iceland where we have investments for basically using natural volcanic steam to generate power, and then back to North America.

And when you go from country to country, it gives you a complete different flavor and feel, and I can share with you Asia is still on fire in a very positive way. I use this expression, huge economic activity. I was so shocked in Singapore to be at a pool 57 stories high, an Infiniti pool that took 7,000 tons of steel just to build. A football field, 57 stories high and packed. It's amazing to witness how fast and dramatic change is.

So what we do see, and it's not just the gold business in my presentation, is I call it the fear and the love trade. There's so much fear, fear, fear in the media, and many of these talking heads, everyone feels they have a PhD in bubbleology. Any asset class that rises automatically has to be a bubble, and they are truly missing what's taking place. And it's not just sort of New York centric. The world, the rest of the world is growing dramatically and it's only going to be a few years.

Everyone was surprised that China has surpassed Japan as the biggest GDP in the world, and it's only going to be another decade that you're going to see changes where it's going to be catching up to the US on gross numbers. Not on a per-capita basis, but I think it's really important that investors appreciate what's taking place in Asia as they're bracing free markets to develop their economies.

And with that the big question is where are you on the S-curve, the super cycle? And hopping over to the next visual, we are big believers in government policy as a precursor to change. It's very simple. Government policy is either monetary or fiscal. Monetary is either interest rates or money supply. Fiscal is tax and spend individually and corporately.

And we like to compare in the next visual the G7 to E7 countries, and what's important to here to remind investors is that the E7 are the seven most populated countries in the world and they are 50% of the world's population. Their GDP impact is only 16%, but they are 50% of the world's population and they are growing on average close to 8%. And the G7 countries are growing at 2% or less. Now, they may be 50% of the world's GDP, but they're only 10%, 11% of the world's population. So this is just simple math for the big S-curve when you have 50% of the world's population growing at four times the rate, that does start to have a change in the economy.

And what's really profound is that America has always led out of a huge recession the world, and this time it was Asia that led it. And here their GDPs are still -- they're trying to slow them down and we're still fighting deflation and to keep them stimulated and we have GDP under 2%. So this is a very different scenario. I was just recently at a conference, a hedge fund conference in California, and Gary Schiller was there speaking. And usually coming out of these recessions, America grows in the first couple of quarters 7%, 8% GDP growth rates. That's not taking place.

So as the world wrestles, Europe and North America wrestles with this huge debt overhang which on average as I've mentioned in previous presentations takes four years, 16 quarters, we're a little more than halfway through it. It's going to be for basically negative news which will create skittishness in the markets, and I think it's key to take a look at outside of us and what do we see?

Look at the next visual. E7 countries, G7 money supply, a key factor, and what you're seeing in the G7 countries that money supply is anemic at 4% and there's no money velocity. There is no money printing because there's no turnover, whereas when you go to the E7 countries you have almost 18% money supply growth and you have with that a higher money velocity so you do see money supply actually getting the traction.

And the next visual is giving you an idea of the price of gold needed to cover the US money supply. Numbers are coming up from research by Dundee Welk saying $7,900. If you look at N2, if you look at M1, it's $3,615. That's where the potential is for gold to go to longer term.

I just think, and I've mentioned this, that over the next five years I think that gold and oil can double from these prices. In Colombia the economy is booming and they're paying $7 for a gallon of gas, and there's restrictions of how many cars can go into the cities. Only three days of the week are you allowed to drive you car into the city. How can that work? How is the economy booming with 7% fuel? There is -- they adapt, they adjust, and I think that that's eventually what's going to happen in America.

The next visual is taking a look at gold demand drivers. There's two parts of this, the fear trade and the love trade. The fear trade gets most of the coverage. It's an important component, but the love trade is also just as significant, and the love trade is basically all commodities.

To understand that, the next visual is basically the fear trade. It's bifurcated. It's monetary policy and fiscal policy that drive it, and whenever you have a great imbalance between fiscal policy and monetary policy, gold starts to behave as a safe haven. And as governments wrestle with deflation and how smart their fiscal policies are and their monetary policies are for wrestling with inflation as well as deflation will basically be the key determining factor to the price of gold relative to that country's currency.

So you can see the visuals, who's in charge of fiscal policy, ill he cut the deficit, will he stop this entitlement program, and will he turn around and go out and create jobs for picks and shovels and hammers and saws where they're non-unionized workers? Will that model be there, yes or no? And if not, then you're going to have a huge overhang of fiscal policy battering it with politicians. And to stop deflation, massive deflation, the monetary policy is going to be putting money into the system. And I think what's important is that what Schiller has talked about is that the central bank has put money into the banks. This is not money supply. The banks have to lend that money to get rapid inflation in money supply.

So with that I'd like to go to the next visual is the inverse relationship between the US dollar and gold. As you can see, as the dollar has been testing new lows, gold has gone to new highs. Mexico has just come out with their central bank and they've bought tons and tons of gold. It started with India, so we're starting to see our E7 countries, those federal reserves are buying gold. Which is interesting because our federal reserve does not keep foreign exchange of other countries' currencies. It keeps gold. So you're seeing this sort of thesis taking place and central banks are net buyers of gold.

However, in the next visual is taking a look at what portion gold as a percentage of global financial assets. And if you go back to '68, it was just under 5%, and gold became free trading in '71, and you would've thought that the rise in gold from $35 up to $100, it would've become a more significant component but in fact it's not.

In 1980 when gold ran up to 850, it still if you take a look at this visual, you would have thought this huge move in gold would have made -- that gold was a higher percentage of financial assets. No. The printing of money and debt by governments has exploded faster than gold. So what you're seeing now since 2001 is a gradual increase in gold as a percentage of global financial assets but nothing close to 1968.

Next visual is the tipping point, the melting point. I would like to remind everyone that water doesn't -- water is water, but it becomes -- goes from ice to water at 32 degrees. There is a tipping point from H2O changing its structure from ice to water, but it's still H2O. That's the same thing with money. It doesn't change except for the melting point for gold, silver, relationships to interest rates is 2%.

So if interest rates were to give you 2% over the inflationary rate, then all of a sudden gold does not become as attractive in that country's currency, and basically with the federal reserve fighting deflation and taking a look at housing prices and where they are and unemployment where they are, odds favor that we are not going to see plus 2% over the CPI number interest rates for a while now.

The next visual is giving an idea of comparing gross financial assets as a percentage of GDP, and as you can see where China is, it's way, way at the bottom.

Next visual is looking at US federal debt versus gold, and you can see the run-up in gold is sort of looking at an algorithm chart model. They're catching up.

Now, the next visual to me is much more significant. It's not the political party. It's the political economic policies, and you can see that under President Clinton that the interest rates were over 2%, real interest rates. That is you made 2% more than the CPI number and gold was 250 and you had a surplus budget. Now we have a deficit and we have negative real interest rates. And by the way, India raised interest rates this week. That unraveled the commodity market because of the -- in particular gold because they're largest buyers of gold, but it's still a negative real interest rate in India. And in China it's a negative real interest rate.

So this is the real key factor to understand the global picture for these commodities, but the difference between [Chindia] which is 40% of the world's population and America is that their social spending, their entitlement programs is substantially less than ours, and their spending is towards job creation. So what is important are economic policies that drive fiscal and monetary.

The next visuals give you a recap that approximately 60% of our deficits in America are related to entitlement programs, and this is where we have to really get serious with what we're wrestling with.

In the next visual is the love trade. I think the love trade is so key that rising incomes and a cultural affinity towards gold, if you want to think that gold is going to fall because jewelry demand is going to fall, predominantly it's going to be falling incomes in emerging countries. And that to me is a key factor, and it's driven as you can see in September Ramadan, then the Season of Lights, and then we have Christmas and Chinese New Year. So it's important to recognize this tremendous volatility in their patterns and to see this, how the love trade is affected.

You can see on the next page is this global seasonality of gold looking over 30 years, 15 years and 5 years, and we do get a real defined pattern. And usually we get gold falling in May into June. It's just really -- and you see the visual. So we're going through a correction. So what? Buying opportunity. This is just what takes place, and there are real factors that drive that. And whenever you have the love trade showing up like the Season of Lights at Diwali like last year and QE2, monetary policy, guess what? Gold makes all-time highs. So I think it's key not just to get caught up in the fear trade but to appreciate what's taking place beyond our shores.

And the next visual is to give you an idea, anticipate before you participate. Volatility does not mean losing money. Now, if you're a speculator trading silver and you're leveraged tenfold and you get pushed out because of margin requirements, you've been forced out to lose money. Most companies that lose money, most entities or businesses or traders whatever, it's because of leverage. So volatility does not mean you're going to lose money unless you're leveraged. And if you're not leveraged, then you can I believe use volatility to your favor, anticipate before you participate, and understand that over any 12-month period gold can go plus or minus 13.8% and gold stocks plus or minus 38%. It's just normal volatility that takes place.

Next visual is some of the things I commented on yesterday when I was on CNBC is the 60-day rate of change, and we like to compare to say the dollar against commodities and then we compare it to other factors just as simplifying our proprietary models for investors. But whenever gold moves X% and the dollars falls Y%, there is a mathematical probability of mean reversion taking place. And what we saw in particular was silver. Silver the only time in ten years it's been out four standard deviations. Only five times three standard deviations, and so therefore you get a big correction, and that triggers because they changed the margin requirements so the speculators were highly leveraged. They get wiped out, but it doesn't mean that you're going to -- that this bull market is over. Not at all. It just means that markets can only move so much before there is mean reversion that takes place.

The next visual, I don't see a bubble in gold. If you take a look at these exponential moves here in gold versus NASDAQ, and gold in 1980, you can see that we're far from that. It's just a nice gradual climb, catching up to what's been the printing of money around the world. The importance of diversification is what we advocate. This is what we're trying to do our best job to sell to institutional investors and retail investors that there is math, there is very compelling, compelling math that shows the importance of diversifying into resources and putting 50% of your assets in the S&P and 50% in this example of a commodity linked securities and rebalancing each year that you (inaudible) perform in the markets with less volatility. So you don't run in and trade the commodities unleveraged in a futures market. You basically buy good active management and you rebalance your portfolio and your weightings between fixed income, commodities, emerging markets and domestic equities and you will be a happy camper as an investor.

And the next visual will show you why I'm a big believer in you need active money managers. As I said earlier, the ETFs, a lot of people are trying to trade ETFs and this to me is where people will lose money because they really don't understand the factors that are driving these commodities and how long these cycles can last. But if you take a look at the visuals here, it's quite substantial how you can go from the basement of the house to the attic, and the changes year in, year out are substantial, and one truly has to have both fundamental analytics and statistical analytics to manage this volatility and capture the opportunities.

I recommend that you please consider signing up for Frank Talk and Investor Alert so that you can be in touch with what we're thinking and what we're doing as trying to educate the world about the significance of the big S-curve, and feel free. Now I'm going to answer questions.

Thank you, Frank. Now we'll take some questions. To ask a question, please type your question in the dialogue box at the bottom of the screen and click submit. The first question we have is for you, Frank. You mentioned your discussion on volatility. As a fund manager, how do you position the funds to protect assets under management from the volatility in the commodities market?

Well, one of the big things we use is raised cash. This is what we did in [middle six]. We went to 40% cash. There are times that we will do that. After the March 30th filings, etc., we did increase our cash levels in for our resource funds and gold funds in particular. We will trade some of these ETFs, the inverse floaters that give you upside and downside, but they're only good for about a week off our mathematical models.

We do cover writing. We will sell positions against our holdings to try to collect income and we'll buy puts. We've been known to sell calls, take the premium and buy puts against positions, so we do actively try to manage that downside, but we really think it's important the stock picking is key here. Many of the mid cap stocks have greater volatility, but this is where growth is in the topline and this is where growth is in the bottom line, and many of these companies have been taken out in the past year. So we can hedge our big cap positions, but it's a bigger challenge on the small caps.

Thank you, Frank. And that's all the questions we have for today. Thank you for the questions. This concludes the US Global Investors earnings webcast for the third quarter of fiscal year 2011. This presentation will be available for replay on our website at www.usfunds.com. Thank you all for your participation today.