U.S. Global Investors' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Nov. 8.13 | About: U.S. Global (GROW)

U.S. Global Investors, Inc. (NASDAQ:GROW)

F1Q 2014 Earnings Conference Call

November 8, 2013 08:30 ET


Susan Filyk - Investor Relations

Frank Holmes - Chief Executive Officer and Chief Investment Officer

Susan McGee - President and General Counsel

Lisa Callicotte - Chief Financial Officer



Welcome to the U.S. Global Investors Webcast; U.S. Global Investors Earnings Announcement for First Quarter 2014. Please note that the slides you see on your screen are controlled by the presenters. You may submit questions during the webcast. Simply enter your questions in the dialogue box at the bottom of the screen and click “submit.” Also, you may now download any PDF of today’s slides by clicking on the Resources tab in the top center area of your screen. You can also download some of the U.S. Global Investors’ latest research on the Resource tab, to switch back to the presentation just click the slide tab. Please note that today’s conference is being recorded.

We would like to begin by introducing Ms. Susan Filyk, Investor Relations at U.S. Global Investors. Ms. Filyk, you may begin.

Susan Filyk

Thank you. Welcome everyone to our webcast announcing results for the first quarter ended September 30, 2013. The presenters for today’s program are Frank Holmes, U.S. Global Investors’ CEO and Chief Investment Officer; Susan McGee, President and General Counsel; and Lisa Callicotte, 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 filings 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. 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.

Now, let’s go to Frank Holmes, CEO and CIO for an overview of the year. Frank?

Frank Holmes

Thank you, Susan. Well, good morning everyone. This past quarter was another quarter in transition for emerging markets and resource funds as where we are streamlining and repositioning, I will try to walk you through what we are doing for the changes. Capital market formation has changed and regulatory costs etcetera in all these factors as we are also changing and adapting to them. We remain still a boutique of publicly listed investment advisors specializing in gold, natural resource, and emerging markets and looking for opportunities around the world.

The strengths still I believe remain go to stock for exposure to emerging markets and resources, debt-free strong balance sheet with reflexive cost structure, monthly dividends of return on equity discipline.

Top institutional holders for GROW, Royce and Associates, Financial and Investment Management Group, Perritt Capital Management, The Vanguard Group, BlackRock Fund Advisors. GROW is a company that continues to pay dividends, it consistently paid for more than six years, current per month starting at January 2013 we will have $0.01 per share, current yield 2.2%.

The next visual, I will just give a chuckle, because it’s the rising cost of regulation and it’s interesting to hear large asset managers that did comments regarding boutique investment managers, this thing is strangling me, I need something to help take the strain off; I can’t run my business says the little guy, I need something to provide the infrastructure to make this work. So we are all going through change, we are all adopters of markets. What’s positive part right now is the stock market continues to make all-time highs and a comment on previous presentations and on the website investor alert many times just follow the money to understand where the money is going and why, but in particular, our expertise and our focus has been on emerging markets resources, which is going through a huge transition as investors prefer to go and trade EPS in active management. That’s becoming more and more evident and we are adapting to that as we reposition U.S. Global.

This process costs money and that’s our highlight throughout this presentation and how we are trying to adopt as fast as possible through the process, but just likely, it’s a process to open up a fund or a product. It is also a huge regulatory process of going through to streamline your functions to outsource etcetera. It’s not fast and ready as normal small business would be able to cut a product line or shut down a department etcetera or move it. It is incredible arduous process that we are just going through right now. And it’s I would call the transition quarters last quarter and this quarter and hopefully we will be free with it. And I have some positives news regarding ETFs.

But let’s talk about what we are doing during this transition period for the corporation the share purchase, repurchase program is in motion. The Board approved a repurchase of up to 2.75 million of its outstanding common stock in the open market through calendar of this year 2013. And as of September 30, the company has repurchased 68,271 Class A shares using cash of $210,000. The algorithm that we used to buy back shares on down days in accordance with all applicable rules and regulations that restricted amounts and times of purchases can’t buy at the opening, can’t buy at the close, in the last half hour and you can only buy X percent on the daily trading volume, but nevertheless anytime the stock is down we will buy a certain portion of the shares back.

And going on to next page is the strategic partnership with Galileo. As we have mentioned earlier, we have purchased a – made a significant investment in Galileo Global Equity Advisors by purchasing up to 50% of the issued and outstanding shares. It’s a Toronto based company. He is doing still exceptionally well in his space. It’s a five star fund. The investment is accretive to GROW. And the big part is now how to reposition and grow for Galileo. It’s just the same as growing for us as all these markets are in particular is resources and resources in the Canadian market has taken on the chin on a relative basis. As you are seeing institutions from the U.S. or from the UK etcetera selling Canadian investments down. This is how it impact, but Michael Waring has done a great job in his – especially his 5 Star fund in performing well for his investors and we are very happy to be associated with Michael Waring.

The next visual, I think it’s very important for you to understand, appreciate another factor that impacted us although yields back in May started this huge rise and corrected to a certain degree, they’re still higher, but yields of long-term bonds and mortgages rose. However, money market funds remained unchanged. And the money market fund burden as a product has become so great that even with rising interest rates what’s taking place with the repurchase program in the capital markets by the Federal Reserve is not adding any light to rising yields on money market funds. And this is costing us. And when we run through the numbers, it’s basically since 2008, the huge economic crash of 2008 and the rebound subsequently however QE1, 2 and 3 has kept these money market fund rates to all time low and thus impact us $1 million a year in our cost to basically maintain at $1 NAV and that’s a big factor why we are repositioning this – those products. And that will save this company a lot of money going forward.

Our next visual is showing that GROWs revenue basically the transfer agency, which is being repositioned with U.S. Bancorp is about 10% of revenue and the advisor funds management is basically earning fees is about 90% of our revenue. I think it’s important to see that revenue will decline with the transfer agency. However, the cost should impact the advisor much better when we take a look at what the transfer agency is able to make going forward and all the regulatory costs and burdens that go with it, it just seems to be prudent at this stage for us to stay focused on investment advisory products. And this service is to change its value, but we will still be managing and educating U.S. Bancorp’s transfer agency and the relationship that we have with customers that’s important. We will make sure that network those connections are very, very tight. So the shareholders never feel that they have been left out in the dark or orphaned, because we are very proud of the fact that we have a high percentage, a substantially high percentage of our shareholders deal directly with us, not through the swaps or the TD Waterhouses etcetera, but we have a direct umbilical link to them and that’s important that we maintain that relationship.

Now, let’s talk about streamlining products. Just on the back of the envelope in a conservative basis, it’s over $1 million that we should be able to cut. I think it can be substantially higher when we take a look at the collateral benefits in other departments etcetera, but basically converting U.S. government savings Fund to an ultrashort bond fund should save at least $568,000, but I think it should be substantially more transfer U.S. treasury Securities cash fund assets to new money market funds is $245,000 approximately. And reorganize the MegaTrends Fund into the Holmes fund will give economies of scale and I think that, that’s important as both those funds are doing very well in a rising market, the S&P making all-time highs. Those funds are also doing well and outperforming the S&P 500 and then mega tax free funds in near-term, we think this is prudent from a investment strategy point of view that our rates start rising over the next three years, short-term funds would not be as impact as long-term funds. And by also putting these funds together, we had economies of scale and we lower our overall expenses of supporting and maintaining these funds.

Let’s take a look at the next visual, quarterly average assets under management. As you can see, these declines, we are still experiencing redemptions and our resource funds and our gold funds even with the big rally in this past quarter, it still doesn’t really matter, you get money jumps in to the ETFs and then jumps out every one’s got a finger that’s on a gun, bullet, ready to pull quickly and get in and get out, get in, get out. So let’s take a look at the next one is the asset breakdown, assets by investment objectives as you can see that emerging markets and resources still are a substantial portion of our overall fund complex. Three quarters of our fund complex are highly correlated to what’s taking place in resources and emerging markets and gold is a part of that resource, overall asset mix.

Now, the next visual is on Page 16 is showing the balance sheet strength, there is no debt, we own our building, our cash level still remain I think substantially strong and investments still look healthy, our investments in funds – our own funds and the S&P related investments have done very well for us. In fact, we personalized some gains throughout the quarter. Earnings per share, they are flat and I think I was pretty happy with that overall being flat in light of what took place this past quarter and I will explain that in more detail in the presentation showing fund flows and explain things like that. But we are still working on what are we going to do to drive these as you see in the next visual, and prove our returns on equity, that’s the real key factor we have seen in the past 12 months is rotation where we fall to the bottom half whereas our peers their returns on equity have surpassed us. And that’s a key factor that I like to look at and try to manage what are we doing with our overall asset base, our book value and what we are doing to get higher returns on that capital. And that’s I believe this transition of streamlining costs will be a significant impact and then coming out with EPS.

The next visual shows you even with this tremendous volatility GROWs still outperformed the past 10 years the Russell 2000 Index, just modestly, but we have outperformed. What has changed in the marketplace is the next visual is just this formation capital in the ETF space, not mutual funds. And so we are adapting to that and never as fast as we’d like, but we are adapting and we are very excited as we are building our marketing plan to come out in the New Year with our ETFs, but the next visual it’s not pretty when you take a look over 12 months, but what’s important for investors is really note the correlation with gold, it’s really – truly gone much higher to the gold or resources as overall asset class and the next visual showing you that the balance we had in the summer with gold, GROW outperforms gold stocks. It’s always done this before as we fall with them, however, any type of a rise we outperform them. And I think that, that’s an important aspect for investors looking at it, but still as we have published many times is to anticipate before you participate the volatility what is the volatility of gold, what is the volatility of emerging markets, what is the volatility of the S&P 500, we published this – we are write on this oftenly. Investors should anticipate before they participate when looking at GROW is to understand what that volatility is. And I think that that relates to the algorithm that we are using to buy back stock that we only buy back on down days because of this extreme volatility, we just think it’s the most prudent way with the capital markets for us to be able to buy back stock.

The next visual is the 23, trying to explain to investors this fear in QE3 slowing triggered massive outflows in funds, in particular, the bond funds. Fortunately, as our overall percentage for assets, this wasn’t a key component. We missed the huge run that went into those asset classes, we never get [which side to] [ph] the degree that we see in this past summer, but it’s also triggering emerging markets. If you take a look at some of the charts of country funds or resources, they just basically went no bid, Turkey and countries like that which were star performers in May, June they just were no better, they just collapsed. On the sphere and with the natural normal ebb and flow of selling, but no bid, these things fell dramatically. But what I might want to point out to investors is that the contrarian is these economies are not going away. Did you know that every second there is 2.5 babies being born as that’s not changing. The world is 7 billion and it continues to grow rapidly. The world is more connected more than ever, from Facebook to the Twitters of the world to visit the LinkedIn globally. This LinkedIn model of people wanting a better quality of life is not going away and to have a better quality of life you need commodities, you need infrastructure and so even to make your iPhones whatever unique commodities to make these things. So, we remain bullish long-term, but we are dealing with a short-term uncertainty.

The next visual show you something that we think is a real key importance and we are going to do a better job in marketing and we’ve done a good job of we are going to take it to another level of short-term tax-free monthly income, what’s also unique, this is the only $2 NAV from what is [inaudible] this particular fund. It gives you a much more stable price traction. We believe it’s a much better place than money market funds to park your cash and that’s one reason why our big government money fund preferring that to an ultra-short bond fund. We believe this is the best for investors even of each rise. It adapts quickly to a rising rate scenario and even near-term with the huge volatility and yields so far now it’s up 50 basis points even with that volatility.

So we think we try to show you in the next visual on 25 that since 2003 or the past 10 years the fund has had spectacular overall performance. But it is the best place as we try to show in 26, where to park your cash, what we are trying to point out here is that near-term tax rate of $2 NAVs you can see has a very stable NAV compared to another fund. It’s a good company, great fund. However, the higher price valuation of approximately $10 NAV much greater volatility. The penny moves everyday if you look into parked cash is always much greater; NEARX as a Moody’s rating, it’s basically makes the investments, 80% of investments are grade municipal securities. So, we achieved two ratings [inaudible] to pick those particular securities and NEARX offers higher yields in three-year, five-year CDs and three daily liquidity. So this is a simple visual just showing the benefits of putting your money, park your money here.

So, that’s the overall the idea of the $2 NAV is going to make the ultra-short government fund not only safe - government securities, but that investor just taking a look for the alternative to safety, but the $2 NAV creates a very stable $2 NAV relative to when you compared to a $10 bond fund. And that means that how often does that fund move one penny in a day, how often this move a penny in a week, it’s much greater, it’s five times greater when it’s a $10 NAV. So the overall return to investors doesn’t change, but the short-term volatility does change and that’s what investors are concerned about and we believe that this type of product this is positioning will be important for that direct relationship because remember as I said at the beginning of the presentation that we have a unique relationship with our investors compared to other fund groups. We have a direct relationship with the high percentage of our assets.

Now I’d like to turn it over to Lisa Callicotte, our Chief Financial Officer to give you an overview of the income statement.

Lisa Callicotte

Thank you, Frank. Good morning. I would like to summarize the results of operations for the quarter ending September 30, 2013. Beginning of page 30, we reported operating revenues of $3.05 million for the quarter. This is down 31% from the $4.41 million we reported last year, primarily as a result of lower asset under management. On page 31 operating expenses for the quarter were $4.13 million a decrease of $328,000 or 7%. This is mainly due to the following.

Employee compensation and benefit decreased $275,000 or 13% primarily as a result of lower performance based bonuses and fewer employees. Performance fee decreased $207,000 to 29% as a result of lower asset through broker dealer platform. On the other hand general and administrative expenses increased to $185,000 or 14%. This is mostly due to expenses related to strategic fund changes as Frank discussed. Included in G&A expenses were approximately [$550,000] [ph] or onetime cost related to streamlining our products. Excluding these onetime expenses G&A would have decreased $165,000 or 12%.

Page 32 showed other income for the three months ending September 30, 2013. This increase $853,000 or 425% compared to the three months ended September 30, 2012. And this is due to gains realized upon sale of securities. And as discussed earlier, the company has decided to exit the transfer agency business, so that we can focus on our core strength on investment management. The transfer agency had a loss from discontinuing operations of $29,000. But by 2014, we anticipate no additional losses related to the transfer agency business. Net loss for the quarter was $37,413 which ramps down to flat $0.00 earnings per share.

Moving on to the balance sheet, on Page 34, we continue to have a high level of cash almost $19 million, and cash and securities combined make up 83% of our total assets. And as you can see on Page 35, we still have no long-term debt. The company has a net working capital of $24 million and a current ratio of 13.2 to 1.

With that, I will turn it over to Susan.

Susan McGee

Thank you, Lisa and thank you to everyone listening in this morning. There have been a few noteworthy events and achievements at U.S. Global over the past quarter and I would like to spend the next few moments discussing them with you. I am pleased to share that several of funds continue to be recognized for their outstanding performance. Since 2000, our funds have received about 29 Lipper performance award certificates and top rankings. And as of the September quarter, two of our funds, the Global Resources Fund and the Emerging Europe Fund were ranked in the top 20% out of the entire mutual fund universe for the 10-year period.

We have three funds that hold the top Lipper Leader Rating. And this rating is based on investor center criteria. On a scale upon the five Lipper Leader Funds that ratifies are in the top 20% of their category. For the three, five and 10-year and overall time period, our All American Equity Funds received a rating of 5 for preservation. The Near-Term Tax Free Fund rates a 5 for preservation and tax efficiency and the Tax Free Fund rates at five for tax efficiency and we find that preservation and tax efficiency are particularly sought by investors in the current environment. And we are pleased that these two funds are highly ranked in those categories.

We had four funds that continued to be highly ranked by Morningstar. And at the end of September, the Near-Term Tax Free Fund and the Gold and Precious Metals Fund had overall ratings of four stars in their respective categories. And then the Global Resources Fund and the All American Equity Fund had overall ratings of three stars among their respective peers.

U.S. Global also continues to be highly recognized of our marketing and communication excellence by the national organization, the (indiscernible) and this year the marketing and investment teams are at 11 star awards that are given out by the MFEA. And that has brought our total to 54 educational awards since 2007. As you know, one of our core company values is to be curious to learn and improve. And this education plays a very important role in our communication with our stakeholders. And we are especially honored because these winners of these awards are selected by industry peers and these are from very highly regarded financial firms. This focus that we have on educating investors, it’s one way that we proactively brand and we market the funds as well as grow. We believe that a key to building assets is through reaching out to curious investors and we hope to build awareness about investing in the global markets. We have two free weekly publications, the Investor Alert and the Advisor Alert that are centered around fulfilling this purpose. We have special reports that are another way that we seek to educate advisors and investors. These reports feature the latest Gold and Resources Research that our investment team puts out and they are free to download on our website, usfunds.com.

Looking ahead, we have got several marketing and sales activities for the rest of the year and I’d like to highlight special call that we will be having with advisors centered around the opportunities we are seeing in emerging Europe. There has been considerable interest in investing in Europe and we have two portfolio managers, John Derrick and Tim Steinle, who will be talking about how they evaluate emerging Europe companies and why they think investors should have exposure to this area of the world.

The distribution at Frank’s blog, Frank Talk continues to increase. We have numerous readers choosing to receive the updates via our e-mail subscription service which is also available on our website. Our blogs mask indication of more than 60 content partner signs reaches millions of visitors and it continues also to be an important way that we increased readership. As one recent example of this content business insider includes and created on a Frank Holmes chart in its Wall Street Times, their most important charts in the world and today that web page as received almost 1 million page views. Frank was the known expert in gold and resources is frequently sort out for his options on these markets on the financial news media and over the past year Frank has been very busy, he is appeared more than 30 times on TV and radio all of it world and creating Canada’s business news network and in Asia.

And now Frank, if I could turn it back over to you and lots of valuable slides related to our investment teams for the next year.

Frank Holmes

Thank you, Susan, I just highlight couple of comeback to recent May that our presentation is just to recognize the cost of advisor as mentioned earlier to maintain the $1 NAV in those money funds has been the extremely expensive, exceedingly expensive and that should even though the revenue changed the expense associated with people there that will began at the same time will no longer be supporting from the advisor million dollars a year of supporting that cost so I feel they support to recognize the shift – the shift is start to show up next quarter and the benefits of the strategic changes.

The other factor that is really important recognizes is called you RIAs and investors has changed dramatically since 2008 just one report I read that something like 90% of people went on sleep medicine and anxiety medicine, the RIA space have been deal to rebound and missing it allowed us the significant move that taken place for stock market leading all time high as many investors played bonds. They’ve missed the spectacular move in equities and we’ve tried to comment on it followed the money presentations and because we do have funds and participating in the speculator movement in the overall stock market.

But the psychology is changed and the psychology is very important factor not only for the PE ratios, evaluations or cash or multiples etcetera but the psychologist changed from being asset allocators to being tactical. There is much more tactical activity taking place and this is another factor that they are all jumping in out of EPS. And you are seeing smart data EPS coming out etcetera and something that will be more in line with we’ll be doing as to serve intelligent rationale, what are the five value drivers that impact an asset class when you look at black, how do you get an outcome for what evaluation for an option it’s five factors.

One of those five factors, two or more significantly the other three, but there are five factors and the same thing happens for looking at stocks when you look at oil and gas is different than mining. We just totally different than looking biotechnology or looking at media and technology or telecom it’s understanding what those value drivers on those factors, I think that will be important for when we finalize to come out with the role of our EPS and we can see those flows because Susan mentioned when we publish a piece is basically becoming syndicated and we’ll have millions of readers, million seeking out those 300,000 readers at a time when you go to these websites which you see is nothing but EPS ads.

The regulatory worlds made it much easier to advertise your EPS in your sector then it is mutual funds. If you have a five star fund, it’s much more challenging to world to put up our five stars and try to show performance and there is almost movement away from highlighting fund performance and that’s created a shifts or there is much more publicity and advertising taken place and that’s the reason why we are quickly adopting as fast as we can with these factor models. We are happy that the SEC chains those rules earlier this year to allow this fast tracking this process and we are very happy, SEC fast track the process for our EPS and giving us clear so that’s a positive note going forward which is basically in our press release.

What I wanted to talk to you about this tipping point, melting points, it’s great for treating the elements of hydrogen and oxygen, H2O is water and H2O is like money, money goes through huge changes at marks with the temperature and what’s important they are tipping points, inflection points, it’s a solid until 32 degrees then it becomes water, it’s just important for best as a recognized that our tipping points in capital market and next was we’ll try to highlight to them government policies do create tipping points they affect monitoring physical policy and we saw the meltdown in emerging markets in the thought process of removing the punch flow back in May of taking away QE3 what the roofing affected at globally and domestically in bonds, in equities, in resources, etcetera. So it’s important to recognize what factors what economic policy that’s either the monitored decision makers or the fiscal decision makers can have a significant impact. So when you look at government policy it’s simply it’s bifurcated it’s either monitory fiscal, it’s fiscal monitory. And monitory is probably interest rates and money and supply and fiscal’s taxing spend, spending tax. And taxes are both corporately and individually and we are spending where the government spending its money.

So let me take that model and we overlap that on to what we call the emerging markets versus the E7 countries, the G7 countries. And it’s a simple model that’s easy for you to get an idea of a macro trend and will support in the areas of look at the inverse relationship of the E7 countries versus the G7 from population to GDP growth rates. Why it’s so important to follow the E7 countries, that’s where the future is, that’s where we see gold volume. We don’t see gold being consumed here in gold jewelry or Europe we are seeing it going to Asia and that’s we are also seeing the GDP growth rates so strong. So it’s so important to recognize where populated countries and now the fact that world is more widely connected and makes it even more interesting.

Now we would like to take a look at money supply as a key factor. We will look at interest rates, but as you can see the money supply in the emerging countries is almost three times greater than the money supply to G7 countries. And that’s significant for economic growth and that means that the overall money supply at 14.2% doubles every five years and that means it’s going to be very strong for economic activity.

Next one is the visual we published many times and we take look even going back to March 2009, when we said follow the money. And what’s really important is under President Obama and (indiscernible) is that the stock markets at all time highs there is lots of negativity over Obama care, there is lots of negativity over policies etcetera. But that’s not we are supposed to be which must be as a money manger told the objective trying to navigate between be a centralist, navigate between these policies and what we try to highlight is follow the money. And we are seeing this money going into the stocks and they gets very important as corporate. America is very lean, is very, very cautious regarding how they spend money, where they spend money just like individuals are much more consciousness where they are spending money and how they are spending money and this has changed the overall market.

Next visual is trying to show you that gold is still attractive. Gold is still attractive against this 2008 where the stock market going to all-time highs, but more money has gone into bonds substantially in gold. Gold gets too much negative information flowing its (indiscernible) and I am going to highlight on that. But let’s talk about where opportunities are. I am such a big believer that contrarian opportunity investors are just too pessimistic especially when it comes to emerging markets. But this is where the population growth is and this is where the opportunities are. If you take a look at demographics, it’s predominantly the aging population in the G7 countries, the E7 is where the growth is. And then you take a look at another contrarian thought process it’s time to own under – under own the areas of the market. And we see here the emerging markets energy commodities and materials are the most under own, under a log I don’t appreciate it by generous. And when that turns, you are going to see a significant rebound in these asset classes. And there are some positive reasons.

The next slides will show you why this is about to turn and we have commented on this in August of this year and also March when we try to find out that Chinese PMI continues to expand. It started rising, it dipped and that’s gone back up, it is rising. And the political leadership is very cognizant and sensitive of following three key factors of the economic engine in China. And there is a huge change to make China more of a consuming country rather than just relying on exports. So I think it’s important to recognize that the PMI positive. We highlighted this back in the summer in fact a factor for that has been Europe. America trades less with China than Europe does. And Europe’s PMI is turning positive especially in Germany and France in the summer is a much more significant to the overall economic activity with China. We are seeing this sort of cascading positively movement taking place with PMI.

And then we like to do other stage of taking a look what – how is oil price (indiscernible) copper prices what happens to other commodity prices when the PMI starts to trend positive. And then we look at the global PMI put up with JPMorgan. And this is another one what we like to look at one month over three months. And every time this is taken place there is a mathematical probability of a stronger market in the emerging markets a stronger market in resources. So we believe it’s under looked, under owned. And this is a great contrarian where you buy Europe at almost half the PE ratio of the U.S. half and you can by giving yields higher than five-year and 10-year government notes. So we think it’s same thing on many of the commodities, stocks that you can do that, that support for investors to look at it. So country and opportunity as the OECD leading indicators improves metals should follow as a high correlation and that’s what we are seeing here on the next visual.

Another one that supports this contrarian thesis is the Emerging European Fund is a golden cross has took place in September and it maintains itself. And anytime this is taking place, usually markets rally and hold themselves. Gold Resources is also the 50 days above the 200 day and this is positive. I think you are going to see a re-rating take place in these asset classes. What we do see the drag that’s affecting our fund performance individually is the small cap arena. The small cap in emerging markets and resources still is lagging dramatically that big capital and the fund flows going into EPS and indexing etcetera is predominantly you are seeing in the U.S., you are seeing in other countries of the world are big capital stocks. But as the economic interest of PMIs continue to show steadiness that all of a sudden has trickled down starts to take place to small cap stocks. And when that takes place, historically, Global Resources are world-class minerals, these stocks explode on relative performance.

The next visual showing another reason to have this sort of contrarian thought process and the opportunities at Central European market are among the most attractive, much more attractive than what we are seeing. And when you look at Korea or the Indonesia and if you look in the past five years, Indonesia, Philippines and Thailand have put on spectacular performance. The next visual showing our emerging Europe is like global emerging markets as a whole. So this is an important part that shows you that being contrarian, I think it’s really important if Germany starts doing and maintains this exceptional growth out of the bottom and just steady growth is exceptional on a relative basis. It has a huge opportunity. It is a huge for Czech Republic, for Poland etcetera. And we saw that Czech basically this week devalued the currency to increase exports because of the deflation is an all-time record low.

We saw the EU this week to lower interest rates, because their deflation is that impacted inflation, inflation is also at an all-time low. So they are dropping interest rates to stimulate economic activity, but the great alpha on the beta of Europe rising is Eastern Europe. So I think it’s an important asset class for investors to have that contrarian perspective to it. And (indiscernible) has taken place, so the wind was at your back, it’s not in your face.

Another visual is showing you Europeans that bounce back when you look at forecast for next year by analysts. But the short-term investor has not seen it yet. There is all this negativity in the media that gives basically a ratio of 3 to 1, it’s positive, but overall, it’s like the stock market. The negative perception of everything, however, the stock market is in all-tine highs. So I try to share with investors please focus, follow the money and you are seeing that European stocks are attracting U.S. funds. The Wall Street just published a piece indicating these net inflows by U.S. domicile funds that invest only in European stocks. And the leverage in Europe is Eastern Europe.

The next visual was showing you attractive valuations for Europe and emerging markets compared to the U.S. So when you look at price to book, when you look at price to earnings and look at dividend yields as these factors emerging Europe is the place to be. The other real significant factor I’d like to point on Page 64 as you see is that each President tries to leave office and have a significant impact globally. Which country do they help? And under Bush, it seems you go back under George Bush, first, it was Mongolia, Mongolia was a significant country of changing around and President Clinton has had a profound impact on Columbia. Basically Columbians believe it’s been President Clinton who has saved the country from the (indiscernible) and the FARC, there are basically bunch of them running around and the peers that Myanmar is going to be with President Barrack Obama becomes famous for. And Hillary Secretary Clinton also they have spent a tremendous amount of time turning around Myanmar, used to call Burma and the opportunity to first-mover advantage has been Singapore and Thailand. Thailand has been an important country as income of money flowing at the Myanmar it ends up have to use the intellectual capital, the machines etcetera and everything that’s in Thailand that come over to help.

And what’s interesting to show you that the Thailand stock market is up 42% of the new Prime Minister. As you can see on visual 66, she is very intelligent, she is very smart, choose the youngest and first female Prime Minster, Yingluck Shinawatra, of Thailand and she met President Clinton as she has got a trip over to Myanmar and you can see that the podium here the presentation she is very confident and she smiles as you can see on page 68 and having do it together, really enjoy the total opportunities are seeing nothing, but happiness as you see in China double happiness. However, one should never forget on page 70 is complex.

That set the slides is have the greatest humor, one of the presentations across the nation and so now let’s go from a little bit of humor on to the gold demand progress because GROW is highly correlated to gold. The Fear Trade doesn’t appear to be as fearful and you are seeing nothing but selling take place in the U.S. this year and I think a key factor to that selling of the Fear Trade has to do with a more important is the current account deficit and that big fact that is importing of oil. The two drivers for oil import is basically the (indiscernible) well over in Iraq and was costing the U.S. military both $500 per gallon of gas to be able to fight in Afghanistan, Iraq in fact that we pulled most of the troops are demand for oil has dropped as a import because U.S. military is the biggest consumer of oil in Americas individual entity. So that’s behind this and I think it’s the other factor has been the incredible technology improvement and looking for oil tracking, taking shale unleashing gas and oil and driving down the natural gas prices which is a big benefit for us to making chemicals.

Our chemical companies have been on fire and we are exploding chemicals because the input for making any type of plastic etcetera it comes from natural gas. Our energy manufacturing is much more competitive because many companies and countries, 25% to 35% of the overall cost is energy cost whereas America still competitive when takes a look at energy prices and the huge increase in gas supply domestically has impacted cold prices so you are starting to see that this rippling in fact has had a significant impact so therefore Americas looks much more attractive and manufacturing looks more attractive so that Fear Trade in gold appears, I’m sure it appears that’s gone away.

But really in what I look at the financial models it has and the key factors there I’ll share with you and the Love Trade. The Love Trade which is 50% of all go to a demand comes for dominant from Asia and so one of the most significant countries is India and India is doing everything to try to stop the imports of gold or the reporting on gold imports because that affects the current account and this is how it impact some of the demand lever to demand remains extremely strong in China. Look at page 72, it just remarkable the numbers came again today that the financial features market trades rapidly in New York very little however something like all it go to Shanghai is taking in Hong Kong physical delivery and China basically imported last year all the supply from gold mines.

In addition to that, we are the largest gold supplier so they are going to looks like the imports like 800 or whatever the number is just a massive number and it seem to be very strong of building gold in this correction. So I think that’s important however the financial markets kind of easily has been interesting to watch that appears on Mondays that these high frequency traders lasts 43,000 contracts of gold for sale, only 300 can sold accounts of the 40,000 but created negative cash getting down to price of gold. It’s happening on a regular basis for the 1st of October is a holiday, it’s the holiday in China, markers were closed and something like the very opening 13,000 contracts hit all bids and create a big cash getting dollar in the price of gold China opens and physical demands are picking up again so it appears if there is some type of Hanky Panky in the financial markets and in the commodities but who knows most of part to me is a long-term that we’ll continues to have two and half babies every second. Both of those babies are coming from nations to the world which have a culture fitting to gold jewelry for weddings, for birthdays or anniversaries for any type of an advance gold is also a monitory as investment for many of these poor people in the world as they gets to each other and simple gold jewelry. And it shows up in next visual that even though the price of gold was not down, the ounce of gold right now in India and other countries is $100 over that smart gold. If you want physical gold it went from $10, $35, $50 and last week when I was talking to the Chairman of the Gold Council that they are seeing at premiums of $100 over the price of gold where its trading right today. So I think that’s important for an investor to recognize that it did trigger huge fiscal demand consumption.

The next visual is just to put things in context. The GLD lost in percentage terms more than apple-to-apple. As you can see in this visual gold has declined 50%, GLD is down 28%. However, next visual shows you that more money was lost in apple $188 billion then gold. And I share with you that the biggest investors for gold, for apple are brokers that will retail. And some of the institutions own it. They have lost much, much, much, much, much more money in apple stock they ever, ever, ever, ever lost in gold. But I regularly go on CNBC and I find us saying gold is the worst thing in the world but more people lost more dollars in relative terms. In fact the apples declined more than all the gold ETS that we will combine.

So I just think it’s helpful to put that in context and we have always advocated that investors consider having a 10% weighting in gold and rebalance it and have diversification in overall equity funds and bond funds and high income dividend paying funds and rebalance each year. The magic rebalance and this visual is showing you that even with the two year sell-off in gold investors are ahead with 10% weighting in our gold funds are rebalancing. So we will continue to advocate this 10% up markets and down markets and understand the volatility.

The next visual is what drives 50% of gold demand is love and that should correlate to rising incomes in emerging markets and cultural affinity. The next visual shows you that there is stronger correlation between rising incomes in China and India or Chindia is well known. And India has had a slowdown in its rising GDP per capita growth and so as China. A modest decline more so in India than China and that has impacted the overall consumption of grams per person. So that’s something that investors have to consider, but the fear that going away, why. Because we have negative real interest rates, we have negative real interest rates and the governments of Japan, Europe and America will revert $1 trillion last year below the inflationary rate by monetizing their own debt issuing bonds and when there is no buyers around they turnaround and buy themselves and therefore they are able to continue print this money. And we don’t see that going away. And we know the benefits that if interest rates when it go to 4% that the interest burden alone in America’s debt servicing would go from basically $1 billion a day to $3 billion a day $350 billion a year to $900 billion the interest of the payment cost. So we feel that. And when you take a look at Japan historically how it’s dealt with its overall bubble of bad experience with real estate and banking, we are going to have similar factor and the government is going to have keep interest rates at negative rates stimulate economic activity. And long-term this has always been bullish for gold as an asset class for that trade.

Now management expectations go through a wonderful pattern. Every year as you can see since ‘1974 it bottoms in June-July and it goes through a seasonal rally. The next visual shows you that it has to do with that from India just took place. There is another Indian holiday and then we have Indian weddings that will be taking place another season for that especially in this district as you get closer too droughty in that area there is a huge wedding season will come up during the month of the December then we have Christmas and we have Chinese New Year. I going over to India next week I hope to get a first hand perspective on what it is really taking place with gold and the demand for gold and it’s rather than less into just other people making their statements talking from book I want to go first hand to get a flavor of what’s going on.

The next visual is showing you that management expectations we like to look at the 12 months rolling oscillator gold is extremely oversold because gold is extremely oversold. And if bold bounces, gold will grow bounces, that’s a key factor to take a look at that this is just simple math that gold as a all-time extremely oversold on a historical basis. And the next visual is showing you that it’s provided a great opportunity for mainly these gold stocks, many CEOs have lost their jobs in the gold space, massive write-downs. They have affected our gold funds or affected our overall revenue etcetera has the cost getting dominant effect and however, many of these companies increased dividends and you are seeing that many of the dividends are some of being cut but many companies dividends are higher than five-year government notes and heard off just absolutely unheard off and you can buy beautiful companies that are paying monthly dividends that are higher than three years government notes and up 70% profit margins companies like Franco-Nevada.

So, I think gold stocks are extremely undervalued on a price and fundamentals price to book, price of cash flow in fact the price to cash flow of gold stocks is an all time historically low that is less in S&P that’s never taken place. So the extreme cosmism has made it very difficult on one hand but exceptional of your country and opportunity let me give you a speech coming for the mines and money in London and these are 50 shades of gold into the next visual to give you an idea that we think – you have an iPhone if you want gold and you can buy gold plated Mercedes, you can buy headphones, you can buy anyone you want is being gold is being and put asset class and I’m pretty believer that will love this comes of emerging markets on the wealth and then interesting to watch that luxury goods have outperformed overall Wal-Mart the world and you take a look at government policies that this past year in Spain dropped the visa requirements for Chinese tourism and Russian tourism and luxury good sales jumped 38%.

The UK follow and they witnessed this tourism because of the wise of this upper class but of China, Russia etcetera that they are saying now that China has 300 billionaires. It just remarkable to see that the economic growth in many of the people made the wealth from having companies the distribution rates for Pizza Hut or Papa John’s Pizza are very clean whatever is we have the right to such products like this American – great American products in China and the opening up stores of a sudden it become extremely wealthy. They all want to travel and you’re witnessed this huge growth so any government policy to change this fiscal policy immediately start seeing luxury good sales exploding. China refused to do it and had even though is the great country of luxury goods they witnessed the decline.

So tourism is very important, tourism to the rise of the upper middle class that want to go and see the world now they’ve got this new fortune they’ve enjoyed and remember that just China and India alone are 40% of world’s population and their GDP per capita is less than one-fifth of ours so that growth in that cycle, money supply etcetera has been growing they showed early in the presentation creates a very strong backdrop as positive long-term for these countries. So I am a big believer that you should have 25% of the overall funds in these emerging markets international and you do this rebalancing like that we’ve allocated on gold and you do cash these huge swings as a stock market goes to it big run, there will be a time for a emerging markets we’ve been put on a bigger mode. So, stay along and stay in touch, please we’ll open up the Q&A.

Question-and-Answer Session

Susan Filyk

Thank you, Frank. Now we will take some questions. (Operator Instructions) I’ll start with a couple of questions for (indiscernible) related to the transition. At what point where the transfer agency services move to the outside service provider.

Susan McGee

Right now we are planning on December – the first week of December change that we will be providing services to the month of October and November for the quarter.

Susan Filyk

One of the restructurings you mentioned was no longer sponsoring the money market trend with your high percentage shareholder is coming to a carefully (indiscernible) shareholder get access to money market fund to our exchange purposes.

Susan McGee

Yes we do think that is important for shareholders as they are moving a month, the equity on the fixed income to have a money markets unavailable to put down to be able to put money and they want to see out of the market. So, we partnered that with fidelity to offer to a treasury on the money market fund and that will be available once we made the transition?

Susan Filyk

Thank you. Frank, we’re seeing mixed reports in our China’s economy improving. Do you think the recent announcements on China’s growth, is not just for a growth environment for resources?

Frank Holmes

I think that the huge mega projects that we’re taking place in China along with the huge housing bloomers taking place in America and the economic expansion in Europe. They were all synchronized like we had in 2003 to 2007 as global economies lined up. I don’t think we are going to see that sort of a surge across the board like we have seen previously. I do see that there is going to be change of moving from coal in China to natural gas to nuclear. I do see that there will be rotations like that. So, one has to be very selective as you see different asset classes move. And we are seeing that food stocks in the U.S. are spectacularly well. Many of these food stocks are up 60%. So if corn prices fall and import prices like soybeans and wheat fall these companies do exceptionally well, and they are exporting and China is a buyer, so I think that this is important to see to put those things in that context. But any type of an upturn in the economic activity for China is important for some of the commodities and particular when we take a look at iron, we are seeing iron prices, steel prices all picking up as the economy is picking up in China.

And I think there are the next big ways and I have commented many times it was delayed, but it’s not over not far from it. It’s a huge infrastructure build like interstate highways under President Clinton, a high speed light rail. This is $300 billion program, this is significant. But most important it will be able to connect the bottom half of the GDP growth per person, that person will be able to travel at 300 kilometer an hour or 180 miles an hour across the country. As China builds about 25,000 miles of hyperlinked trains and we’re not through the half way mark. So, I think that we’ve seen this many times the melting point, the tipping point is when you get through that half mark, and companies like Starbucks, McDonalds etcetera they are all positioned to be in these super train stations, these super hyperactive areas of nodes of influence where these light rail trans will be connected to huge subway underground systems. We are seeing that there is substantial construction boom taking place underground and building subways in the second Tier and third Tier cities. Subways so put things in context at Shanghai in 10 years has build more underground subways than those in England, which took 200 years of basically building the tube.

And just putting that in context what happens when you have 100 cities with more than population greater than a million people. You have 50 cities of greater than 5 million people. And the policy to create jobs is to have these infrastructure projects, but the ones now are for the lower end of the GDP per capita individual. So, they feel that they have entered into this huge economic activity rather than looking across the highway and seeing a big skyscraper they themselves can turn around and enjoy this prosperity and also enjoy their families when they travel across the nation. So, I think that that will be a key factor in generating greater resource demand.

Susan Filyk

Thank you. Many larger firms remain various resources and commodities and portfolios are often under spaces, what reactions you are in contrary getting from RIA?

Frank Holmes

Well, I think that when the things are extremely oversold and contrary and people need them every day, so the gas tanker drive new car that it makes easier for us. There is going to be a change. We do get tractions from that investor that understands key companies and key commodities, that’s contrarian. We are getting very positive traction with that RIA. And I think the more important factors that the 50 days above the 200 day now and it does amount to who they are all everyone is a trend follower to certain degree, but if something is still dramatically undervalue and the price to earnings, price to book value and the trend is now the wind is again backed on your face then there is a higher level of confidence. So, I think that we probably witness that change. We have to make sure that the money active managers outperform the benchmark, that’s the real key factor that relative basis. So, the fund itself has got the right direction to, but it still has to show that alpha, the alpha that we showed in 2001, 2002, 2003, 2004, 2005, 2006, 2007.

Susan Filyk

And finally, the economy has developed, European countries are improving, how closely you enter the emerging European countries to the developed countries?

Frank Holmes

They are very much connected. You have to take a look at banking, you can go pay the best way to pay Croatia is through an Austrian bank, which we own. The Swiss banking system has been predominant mortgage lender in Poland. So, it’s important to recognize that economic in one country leads to economic activity on another. And the cost for labor there, the economist countries are extremely well educated, especially when you compare them to the overall education level in Latin America or Africa, it is – it’s really quite remarkable skill sets that you have in Eastern Europe. If you take a look at number from PhDs to car mechanics, it’s just a substantially greater number that are educated with college degrees. And with that being a skill set not just for education to be a doctor or lawyer or a scientist, they are very skilled at manufacturing and that lends itself at you have seen German companies outsource lot of activity to Poland to the Czech Republic. And so that as the – and their cost for labor per hour is roughly one-third of the cost and sometimes one quarter what a cost of manufacturer something in France or Italy or Germany. So you do see this cascading that’s so positive going out to these other countries.

Susan Filyk

Thank you for the questions. This concludes U.S. Global Investors earnings webcast for the first quarter 2014. This presentation will be available for replay on our website at usfunds.com. Thank you all for your participation today.

Frank Holmes


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