- GROW is a two-part story: company specific initiatives and macro dependence.
- On the company specific side, assets under management have been under pressure in recent years, but the company is taking a controlling position in its Canadian joint venture and launching ETF products in order to revive AUM.
- On the macro side, the company's performance is highly correlated with the price of gold, and demand for gold and natural resource funds will be the main driver of AUM.
US Global Investors (GROW) has had an impressive this year (up 50% YTD). After reviewing the company, I think investors need to understand that GROW is a two-part story: A company-specific story that is intertwined with a macro-economic story. The company has a plan in place to grow assets under management (which have steadily declined over the last several years), which is the main driver of earnings. But, this growth is heavily dependent on the demand for gold, resource, and China-focused mutual funds. Overall, it's an interesting story, but its more a play on the macro than anything else.
The Company-Specific Story: A Rebound In Assets Under Management (AUM)
GROW makes money by charging a management fee to its clients, so earnings are driven by the amount of assets under management, or AUM. As you can see, there has been a significant decline in AUM over the last several years, which has hurt earnings:
Source: GROW Investor Presentation
So, the company-specific story is: Can the company re-grow AUM? Part of this answer is dependent of whether there is demand for the company's products (more on this later in the article), and the performance of the asset (strong performance will raise the value of the existing AUM), but the not there other piece is the initiatives the company has in place. First, the company plans to take a controlling position in its joint venture in Canada, Galileo. The chart above shows the boost that GROW will get from that transaction. This transaction lays the groundwork for the company's move into the ETF market. Though margins will be lower on these funds, its should help improve AUM. These ETFs will become focused on international markets, where investors cannot get direct exposure.
Overall, the company is making a push through company-specific initiatives to grow AUM, but in reality, it all comes down to demand for the product.
The Macro Story: It's Really All About Gold and Natural Resources (and some Treasuries)
Over 50% of the company's AUM is located in three funds: The Global Resources Fund, The Gold and Precious Metals Fund, and The World Precious Minerals Fund. A big reason for the decline in AUM over the last several years was the decline in gold and minerals. So, an investment in Grow is a bet on these commodities rebounding, so that demand for these types of funds grows.
As you can see in the charts above, the company's stock performance is highly correlated with the price of gold. Additionally, the company shows why they are so bullish on gold at its current levels. Where the price of gold goes is really up to the individual investor to decide, but I just wanted to point out that if you invest in GROW, you are also betting on a rebound in gold at the same time.
Strong Balance Sheet
One of the attractive aspects about GROW is its strong balance sheet, with about $31MM of cash and investments (50% of market cap) and no debt:
If all goes well with the company-specific initiatives and the price of gold, you could see share repurchases increase. The board recently approved up to $2.75MM worth of stock repurchases for 2014. I would take it as a big positive for the business if the company were to increase their share repurchases.
It’s really tough to put a figure around earnings because they will be very volatile on the performance of commodities the company invests in. But, I think it's very important that investors understand this risk/reward dynamic before making an investment. For now, I’m staying on the sidelines.