U.S. Global Investors, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

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U.S. Global Investors, Inc. (NASDAQ:GROW) F4Q08 Earnings Call September 11, 2008 11:00 AM ET


Terry Badger - Director of Communications

Frank E. Holmes - Chief Executive Officer, Chief Investment Officer, Director

Susan B. McGee - President, General Counsel

Catherine A. Rademacher - Chief Financial Officer


Welcome to the U.S. Global exclusive webcast and US Global Investors fiscal 2008 earnings announcement. (Operator Instructions) We would like to begin by introducing Terry Badger, Director of Communications and U.S. Global Investors.

Terry Badger

Welcome everyone to our webcast announcing results for the fourth quarter of fiscal 2008 and the results for the full fiscal year. 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 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 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 10K filing for more detail on factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today and U.S. Global Investors accepts no obligation to update them in the future.

As mentioned by the operator there will be a question-and-answer session following today’s presentation. If you would like to submit a question during the webcast, feel free to do so at any point by clicking the Questions button in the upper right side of your screen.

I’d like to now turn the presentation over to Frank Holmes, CEO and CIO, for an overview of the fourth quarter and the fiscal year.

Frank E. Holmes

Page 4, I’d like to just walk through showing that the revenue was down modestly and the biggest difference for the down in the revenue happened to do with incentive fees in the resort sector. I’m going to comment about that in a little more detail particularly the incentive fees. Incentive fees from the relationship which we have with Endeavor was slightly off. But the overall income, we’re very happy with the earnings per share. Later in this presentation I’m going to break down what the incentive fees are with and without, to show you the core business.

Next page is 5. Excluding performance fees. As you can see our earnings per share were $0.59 versus $0.52. That swing has been the bonuses we earn off of consulting for outside funds and it can have a big swing factor. What’s interesting in the market place is that the market always values bonus fees at a lower ratio versus your core earnings. And your core earnings as you can see still remain quite healthy even though last year we had substantial volatility in the first quarter like we’re experiencing this quarter. Markets have been very volatile. Last year August the 12 of 07 we had the first unraveling which I’m going to talk about also within the presentation of the derivative issue and the repercussions of the market place as we have these liquidity crises and events. We rebounded from each of those periods and still were able to generate in our core business very healthy earnings per share.

Next page is 6. This is a financial snapshot of the quarter. As you can see the difference in the revenue, the net income, earnings per share was predominantly the difference, the decline is attributed to the incentive fees that we received from Endeavor in particular. We’re much larger for year-end 07 than they were in 08.

The next picture is excluding the performance fees, just the core [inaudible] business, earnings per share were in fact up for the quarter on a year-over-year basis. So I think this is very significant whereas most of our peer group in financials did not experience such dramatic growth.

Next is non-GAAP disclosure. And I’m just basically going to turn this over to Catherine to make a few comments on the technical requirements.

Catherine A. Rademacher

This relates to the slides that show our performance excluding performance fees and related expenses. If you start at the top, we’ve got our revenue on a GAAP basis; we’re excluding our offshore performance fees coming down to a new net income number and then also excluding any expenses related to those performance fees to come to an adjusted net income. When we do this calculation as Frank mentioned we show that our performance did increase in earnings and earnings per share both for the fiscal year and the quarter. And I’ll talk a little bit more about that later as well. This is a technical disclosure. We are required to show a reconciliation between GAAP and non-GAAP numbers.

Frank E. Holmes

Catherine Rademacher, Ladies and Gentlemen, is our Chief Financial Officer. Thank you for highlighting to the listeners.

Hopping over to the visual number 9, mutual fund assets. As you can see the three-year compounded annual rate of return has been 42%. The offshore client business continues to grow. The three-year number in the category is 290%. I’m impressed with that because there have been predominantly net redemptions in the first six months of this year. I think it was over $50 billion was redeemed of equity funds. We have been able to show for the year and for three years relatively healthy growth. In particular the most volatile sector has been emerging markets and resources where our core expertise lays.

The next visual is 10. I wanted to try to put things in context for you and show you that the average assets under management, what they did on a quarterly basis going over the past year and then looking at the Russell 2000 financial index. We are part of the Russell 2000 index and at times we correlate. When it’s down large, we’re down large. And then on other days we’ll be correlating with the price of gold or with the price of oil. So it’s interesting to see this dimension but what’s most important is to see that even though our assets did exceptionally well, we turn around and we’re subject to a decline roughly with the Russell 2000 financial; that trend. Even though we do not have any debt on our balance sheet and these financials in the Russell 2000 have close to 40% debt and a lot of that debt is now exposes to derivative problems and we do not have any of these derivative issues in our products, in our product line.

I’ve always said that when brokers from Wall Street come down with their structured notes and ideas to put for our products, for our funds, I say “No because I’m not that smart.” I can’t get enough transparity with it so we’ve always backed away from buying anything for any of the products or any of our funds and vice versa even for our balance sheet. It’s very, very clean. So it’s very important to make this comparison on how healthy our balance sheet is and that’s what’s really taken place in the Wall Street. The unraveling of financials has to do with this massive destruction of balance sheets, and our balance sheet remains healthy and intact with lots of cash.

Hopping over to page 11 is I’ve recently given a presentation. I want to put this in context for you. That good-looking guy Warren Buffett in 2002 after buying General [inaudible] announced that these derivatives are the weapons of mass destruction and why he said that is because he found he couldn’t find a true bid for his derivative book and it was based on what’s called notional value. He took billions of dollars of hits with it and warned about this explosion in the growth of derivatives. Most people yawned; ignored it; and they’ve only grown 500%. And now we’re dealing with the wrath of this meltdown in these weapons of mass destruction on balance sheets.

Lehman Brothers, etc. What we believe is much more significant in the market place and it’s making me get bored and actually disappointed that all the CNBCs can do is talk about Lehman Brothers. It’s a great firm. It’s sad to see what they’re going under but darn, I think the auction rate paper is much more significant to the investors of the market place to seeing their cash frozen and that that has state regulators come in to pounce on brokers that try to get this money released. But when you have $330 billion frozen and you have half of the sales force of some of these major brokerage firms, it’s catatonic because they can’t get the cash for their high number of clients is frozen. All this relates to these weapons of mass destruction. These are offshoots of this liquidity crisis and I think that that’s much more significant in the general market place. We see that in the equity flows. Sorry I’ve gone a little on a diatribe here on this issue but it’s interesting to see that the ramifications are creating an opportunity between stocks that have value and those that don’t.

The next visual is to put these weapons of mass destruction, these derivatives, in context. I recommend you go to the Bank of International Settlements to learn more about it, but just to give you an idea, the total money supply worldwide in US dollars is $15 trillion which is basically 1/10 of the derivative market. The world GDPs are 1/10 of what the derivative market is and the total value of stocks and bonds in the world is $100 trillion which is basically 20% of the value of these derivatives. So when you add up 2% right down these derivatives you need to have tremendous amount of equity being raised in the capital markets to offset the leveraged balance sheets and that’s what we’re seeing with the Lehman Brothers, the Citigroups, etc. and with FAS 157 rules like this, it’s not ending.

But at U.S. Global we don’t have any of these products. We don’t have them on our balance sheet. We’re not leveraged and we’re just clean and mixed simplified how we focus on that and I think the next page shows that since 2000 this investment team has won 26 Lipper fund awards and certificates. And we’ve been through many volatile periods since the year 2000.

Hopping over to the next visual is page 14 giving you an idea, and the reason why I’m showing you this is this is what attracts the assets and that is global resource fund of world’s precious minerals. We’re best natural resource fund, best [inaudible] fund for the past five years ended December 31.

The next page is near term tax-free. It shows that we’re diversified even from a fixed income we provide extremely attractive yields. Our government money market funds are very safe, very attractive yields, top performer which helps diversify.

Fund performance. The next few pages are basically what we have to do when we talk about our funds is make a disclaimer to be in compliance with all the different regulatory arms. What the one, three, five, years of performance are, cap expenses. So the next pages and 17 is just further basic best practices in a highly regulated world.

Let’s hop on to page 18. What we’re doing to continue to brand ourselves. The media is very important. In fact we’ve built our own TV studio. It’s just very time consuming to go to a studio nearby. You can waste 25 minutes to an hour getting there and back. So we’ve done everything in-house as part of that branding strategy. And the same thing with education. We continue to win educational awards and that’s what’s really important to us for our website is to be able to explain the bolts of the risks as well as the great opportunities that we see.

And with that then we show page 19 is that we have over a million newsletter subscribers who have seen articles featured on our funds. This is a wonderful part because we have so many small customers throughout America that diversify their asset base in our funds. The benefits of that, it’s much stickier money and what we’re seeing is that a lot of the bigger money is hotter money especially in the hedge fund world which is right now pounding resourcers. We are seeing the liquidation of hedge fund after hedge fund and talking to recently institutional accounts, they’ve basically found that they’ve taken money from funds of funds and they do not know who the owners of these funds are and it’s hot money chasing and right now it’s in liquidation mode.

So we’re seeing pressure in our global resource fund and any of our funds that have exposure to infrastructure, etc. It doesn’t matter that they’ve gone from 12 times earnings to six times earnings and some have gone down to five times earnings and meeting liquidations by these massive pools of capital that really don’t carry book value and you add that on the top of the fears of brokers going bankrupt, you’re seeing tremendous disruption in the market place.

What I’m going to share with you is that the commodity cycle still is intact. I’ll discuss that in a little more detail and what’s interesting is that a lot of these newsletter writers are very early in capturing this huge secular trend in commodities and infrastructure and emerging markets and continue to write about it in a very constructive positive way. And we want to thank them also for educating and recommending our funds.

Page 20 is assets under management. As you can see for second quarter, take a look at 07/08 in our numbers, 12% versus the peers. Taking a look at earnings, coming back you can see that our earnings per share are showing that they’re off 40% versus the peers. But basically what’s important here is that a big bulk of that came from the incentive fees for clients such as Endeavor but when you take a look at the core assets when you really want to compare to these other fund groups that do not have a big leverage to incentive fees. Our earnings per share are +69% and that’s much stronger than the industry as a whole.

Return on equity is page 22. That’s most important to me in looking for companies to buy stocks for our funds. It’s also most significant how we run our company. We like to have our salaries low and incentives tied to performance. That’s our culture. We’re performance and results driven. And what you can see is that we have substantially higher returns on capital for the past year and the past three years. And what I want to highlight to you is that our peers have leveraged balance sheets and if they had to go cash on cash returns on capital, they would be less than this. So with the leveraging is how they’re getting these numbers and in Russell 200 financials they’re negative. As an overall group, tremendous bankruptcies and write-downs with the derivative mess.

Hopping over on the growth strategy I’d like to turn it over to our President and General Counsel, Susan McGee, to talk about some of the exciting developments that are taking place at U.S. Global.

Susan B. McGee

Looking forward our growth strategy is going to continue to be the same as we’ve discussed with you previously. We are trying to diversify our product offering and will be trying to develop our hedge fund business. We are also focusing for our registered funds on the institutional sales channel working with consultants, warehouses, independent broker dealers, and registered investment advisors. We have paid particular attention to the global megatrend fund. It is our infrastructure-related fund. We began managing this fund back in October of 07. We’ve seen very healthy flows into this fund and that will continue to be a focus of our sales efforts going forward. And we’re going to also focus on our web-based marketing and sales initiatives that we have begun this year.

On the next page I’d like to discuss with you a proxy that we have out right now for U.S. Global Investors funds and U.S. Global accolade funds. It is not a growth proxy but it is a mutual fund proxy that is out there. We are looking to combine the two fund trusts into one trust for better efficiency and administration. We are looking to update the management fee on four funds that have very old fee structures in place right now that do not take into account current economies of scale. We are also requesting the fund shareholders to approve performance-based fees on all of our equity funds. We believe that the performance fee will better align our performance culture we have at U.S. Global Investors with some performance. And also lastly, we are asking fund shareholders on the equity fund to approve distribution plans because distribution is costly and expensive as we all know and we’re asking that fund shareholders participate in some of the distribution fees.

Now I’d like to turn it over to Catherine Rademacher, our CFO.

Catherine A. Rademacher

I’d like to briefly summarize our results of operations for the fiscal year 2008 which ended on June 30. Starting with our revenues on page 25, we recorded total revenues of $56 million for the year down 4% from $58.6 million in fiscal 2007. As many of you know, over 80% of our revenues come from advisory fees which in turn are derived from two primary sources: Our SEC registered mutual funds and our offshore clients.

Starting with our core operations, investment advisory fees from our SEC registered clients increased by 9% to $39.5 million largely due to increased assets under management during the fiscal year which Frank mentioned earlier. The second component of advisory fees from our offshore clients decreased 50% which also Frank touched on from $13.1 million last year to $6.5 million this year and lower Endeavor annual performance fees were the primary reason for this decline. As we’ve mentioned in our webcast and in our filings, these performance fees may fluctuate significantly from year to year based on factors that may be out of the company’s control and we’re seeing some of that volatility this year.

The third primary component of revenue was transfer agent fees which increased 12% to $8.5 million primarily as a result of growth in the number of shareholder accounts and a revised transfer agent fee agreement that was effective in April 2007 but incorporates transaction and activity based fees.

Going on to the next page 26, our total expenses for the year were approximately $39.5 million a 5.9% increase over fiscal 2007 and there were three areas that had the largest impact on expenses. First were platform fees which increased 20% to just over $9 million as a result of increased flows to our broker dealer platforms is something Susan touched on earlier. Second, employee compensation and benefits increased by 8% to $13.6 million primarily due to an increase in the number of employees as well as an increase in selective salaries to remain competitive in the market. Third was G&A. The two increases I described above were somewhat offset by a decrease in general and administrative expenses of 9% to $6.8 million primarily as a result of lower consulting and legal fees.

So next we can turn to page 27 which shows our net income for the year of $10.8 million or $0.71 per diluted share compared to $0.90 per diluted share in fiscal 2007. As we discussed earlier Frank and I did regarding page 8 on a non-GAAP, had we excluded our performance fees our earnings per share would have increased by 11% for the year from $0.53 per diluted share in 07 to $0.59 per diluted share for fiscal 2008. So again refer to that non-GAAP disclosure on page 8 for more detailed information.

Finally going to page 28, I’d like to discuss the strength of our balance sheet that Frank touched on earlier as well and reviewed some key numbers. As you can see our cash and cash equivalents have increased by 56% in one year to $25.1 million. In addition cash, cash equivalents and marketable securities combined make up about 73% of our total assets. And as you can see on the next page, on page 29, our total liabilities have decreased 28%. We currently have no long-term debt and the company has strong liquidity with net working capital of $35.3 million and the current ratio of 6.6 to 1.

With that I’d like to turn it back to Frank.

Frank E. Holmes

Let’s talk about the future. When we forecast that earnings are going to be, we can only mention how we physically handle the sailboat through waters, both stormy and sunny. And right now we’re going through a storm which we’ve been through many times. We’ve witnessed them and the biggest thing I’ve ever found through these cycles is having lots of cash. A lot of our funds the majority of these funds have huge cash positions. Susan’s comment on the megatrends fund which continues to grow the infrastructure. Even with the decline in the market place and the sentiments so pervasively negative, it still runs over 25% cash and it’s been that way for several months. We’re seeing that the cash is a way that gives us an opportunity to be able to buy.

I’m going to walk through now for you and talk about the commodity sector and give you a sort of bigger picture that we see because we like to talk about cycles. So let’s hop to page 31. As you can see this is research from Morgan Stanley and also another group called Stifel Nicolaus & Company. They look at these long-term cycles, and this particular page is Stifel Nicolaus, and I’ve mentioned to you that we look at cycles [inaudible] cycle which is 18 to 20 years based on infrastructure spending. Their research goes back to 1795. This shows you that on average these commodity cycles last 18 to 20 years also. So if this cycle is over, it’d be one of the shortest cycles basically only six years of basically turning up; very short period.

And I have dealt with that mainly because of the population demographics which I’ve commented on many times coupled with government programs. It was good to see last night in the Financial Times that China’s inflation rate is collapsing and that means the policies of slowing down their economy and shutting down businesses for the Olympics so the air would be clean, etc. government policies are now for growth. And with inflation dropping dramatically, this will end up also in the US. With the dollar going through one of the greatest short-term runs ever, it will have an impact on inflation. Inflation drops, that will turn around and spur economic policies for growth and without any threat of raising rates.

So let’s take a look at this. As you can see we’re still in looking at history and doing public analyses the early part of a cycle. So now it’s time for the big picture. Let’s go to 32. It’s a yearly cycle. What’s important here is for investors to recognize we’ve done this for all asset classes. You can take the 10 sectors of the S&P and no one sector stays at the top, but what you see here is tremendous rotation in the commodities. The volatility on a year-over-year basis is amazing.

So let’s just take a look at crude oil, top left-hand side, in 1999 it was up 112% mainly because in 98 Russia had imploded and the global emerging markets had collapsed because in 97 with the Asian crisis many of the Russian crisis and emerging markets are very key to oil demand. Then by 2000 you can see the price of oil falls dramatically on a relative basis and then 2001 it’s up 25%; 2002 it’s up to 57%; and then it’s down; and then it’s back up.

So if you take natural gas, you can see it’s at the bottom half of the pack in the middle there in 99, it goes to number one, and then it goes to the bottom of the pack, then it goes back up to number one, and then it falls to the middle, then continues to fall, raises to the number one, and then collapses. So 2005 gas goes from being the best performing commodity to 2006 the worst performing commodity.

What I’m trying to point out to you is that there’s tremendous rotation within the super cycle on an annualized basis on these commodities. That’s the reason why philosophically I like to have lots of cash to be able to buy these things when they’re at the bottom of the trough because mathematically odds favor a change in supply/demand factors. What’s really important for investors to recognize is that I was bearish in oil running to $1.40; I was on CNBC, etc. for short-term demand disruption.

We are now going through a healthy correction. It’s brutal percentage wise but it’s healthy for the economy. But the supply side of the commodities is not there. It is nothing for any major disruption to have copper prices spike. And basically most of these commodities, supply remains tight and the demand is slowing down but any upturn on any demand and all of a sudden these commodity prices explode on the upside. That’s the real key factor. If we saw a huge sustainable supply, then we would change our opinion on commodities. But we do not see any huge supply that is sustainable and most of the corrections due to demand slowing demand. But what does that do? It triggers governments to immediately add policies for growth to create jobs, to get re-elected, and away you go. And the only way to have huge supply of commodities that are sustainable is for these commodities to trade up much higher prices than they are today and we don’t see that.

We also see every day in the newspaper governments in emerging economies moving the goalposts, changing the tax programs for these commodities for new mines that come on stream, oil and gas, and these mines are not coming on. Mongolia still can’t get its act together with the largest copper-gold deposit. Huge, huge potential to ship right to China. China built a railway right to the lip of Mongolia and the government still can’t get their act together. These projects won’t come on supply for many, many years and that’s something that we see over and over around the world. So that makes us very bullish long term. Short term, tremendous volatility.

Now what’s important for investors to recognize? What’s very painful for this past quarter is the same thing took place last year in this past quarter, summer quarter, is that not only do you get a rotation of the commodities; you are having a liquidity crisis. So non-core related assets all correlate when the Lehman Brothers or the Citigroups or whoever’s having problems start basically giving a margin call to their prime brokers to all asset classes and every asset class has to go out the door the same time trying to search for bids. And that’s what’s taking place today. So it’s recognizing that as where are the buying opportunities, and you can buy these stocks at very, very inexpensive multiples; 1/3 the multiples of the S&P 500.

So let’s go from page 32 over to 33. I’ve given you the super cycle; I’ve given you the annual volatility; now let’s look at the 60-day rates of chain volatility. We take a look at this and we point out to you that you get these cycles of extreme over-borrowed over-sold and right now as you can see on the bottom right-hand side, gold is down over two [inaudible] over 60 trading days. It is extremely oversold. We’re going to find a bottom here. As you can see I can take this back 30 years of data that we’re close to a bottom. This rally in the dollar has been a big impact on gold declining. Oil oscillator is another one to take a look at was extreme on oil. Oil prices are down almost like they were in 02 in a short percentage turn and I think that we’re going to find a bottom with oil between $85.00 and $100.00 a barrel. We’re going to find some form of a bottom.

The next page is showing the dollar. The dollar’s gone through an extreme movement. In fact today it’s even up more than this visual is showing you so it’s at one of the all-time shortest runs you can see. And mathematically odds favor for correction. What’s important though is that when the dollar becomes over-bought as you saw in 05, it can stay up there for three to four weeks. So you can have three to four weeks of just this bloody pain and you get these massive redemptions. With hedge funds, they don’t get redemptions up $10 million, $15 million; they get $3 billion hit all the bids. So a lot of the stocks that have the growth metrics that we look at or we’ve found also in these hedge funds and then they just are getting knocked down to silly valuations and it’s providing good buying opportunity to buy them selectively. So it’s important to recognize these risks. So I’ve taken you from big right down to micro what the volatility factor is.

What we focus on is 36. We like to look at the emerging seven countries versus the G7 and what we see here is economic activity still remains pretty robust and that’s a key factor for the strong oil demand. Oil did overshoot to $140. That concerned me. It’s way ahead of itself on a relative basis because you can see the G7 are slowing down and oil demand from the G7 is off over a million barrels a day. So that is having an impact where the E7 countries, the oil demand on a daily basis is up. And I think the happy balance, we’d call that happy equilibrium, is between $85.00 and $100.00 a barrel. And what we’re seeing with this bailout of Fannie Mae, etc. is the transfer of trillions of dollars from investors, basically from public markets into the taxpayers. That’s always bode well for gold. When you have a negative real rate of return and you have a huge increase on a monetary basis, taxpayers basically buying that debt which is trillions of dollars, it’s only a matter of time before it shows up in the price of gold.

Next is showing record valuations by Morgan Stanley in these mining stocks; how cheap they are on a historical basis. So I’m just trying to highlight to you that we’re closer to a bottom than we are to any top.

The last visual is the future opportunities. What’s key is the relationship between commodity demand and emerging markets. Infrastructure spending and as you can see form this piece of research published by Morgan Stanley World Bank, over basically the next 10 years there are over $21 trillion forecast to be spent bidding out in emerging markets. China’s still the main player in that space; India, Russia, Brazil, etc. and we believe we’ve not seen huge destruction in the spending by these countries. So we remain very bullish long term. This fits into the super cycle for the commodities. Supplies remain constrained. The demand is slowing down in the G7 but right now the governments are pumping everything into the economies to keep them going so we feel very comfortable that this cycle will reverse. What will be the key factor? We never know. But when everything’s become, the dollar’s over-bought and oil and gold are extremely oversold, something takes place to be in reversal.

The last thing I want to come back to is now questions and answers.

Question-and-Answer Session

Terry Badger

Now we’ll take some of the questions that have come in during the webcast and let’s start with one for Frank. Here is a macro question. We’re clearly in a better market in the US. You’ve been in the business for quite some time and you’ve no doubt been through these before, so what’s the best way to shepherd the company and your funds through these difficult markets?

Frank E. Holmes

Bear markets are very rare in the fourth year of a presidential election cycle. 80% of the time markets are up. I think it’s even more severe that when you have a bear market in the fourth year that governments go way out of their way to do everything to protect the economy. We’re seeing that. We’re seeing the government take action to bail out Merrill Lynch in the capital market. Stocks are basically naked shorting. They’re doing everything that’s possible, now Fannie Mae, to create a support system through the economic engine. What will that do? A year from now you’ll see a huge explosion in economic activity from that. What do we do? Always have cash. [Roger Gibson], we’ve always commented on him, is to have 25% of your assets in resources, 25% in international, 25% in domestic, and 25% in safe income healthy dividend paying stocks or very safe income to be able to capture these opportunities when things go on sale. So that’s the basic thought process for us is to make sure that you’re diversified.

Terry Badger

Question here for Susan McGee. On your part of the presentation, how are the flows from the new relationships you talked about in the past, I’m assuming that’s through the intermediaries?

Susan B. McGee

We saw flows beginning to come in through some of our new relationships and then the economy began to worsen over the summer, and I think as is indicative of the mutual fund industry as a whole, flows seemed to only flow down. So we’re not seeing the flows that we had hoped for but we were not anticipating the slowdown in the economy. But these relationships are starting to come to fruition.

Terry Badger

Question for Frank. Strategically, do you manage the company as if performance fees were not there and that they are just a nice bonus if earned? Is compensation from performance fees the majority of GROW’s bonuses?

Frank E. Holmes

I would share with you that you see that growth in the fordiac business is quite healthy relative to our peers and that has to do with performance. Performance is a key driver. And strategically I have done everything to create a culture, and one of our values is to curiously learn and improve and to be performance and results driven. Our salaries are low; our bonuses are tied to performing; and it’s always been in the top half. Our fund managers get half of the bonus in the funds which they don’t trade, which they stay long so that they’re incentified.

I think that the new vision that we have of merging the trusts has great, great benefits for all shareholders and employees of U.S. Global. This trust that we have is antiquated. It’s old. It’s their prior to Schwab One Source ever being created. The Fidelity platforms. It has a fee structure that basically says you’d have to shut down the funds to exist because the regulatory legal costs and the marketing and distribution costs have grown exponentially. Legal bills when I first bought this business were $100 an hour. Now for fordiac they’re $1,000 an hour. Audit bills, etc. So we need a fee structure that’s going to be more aligned with the cost of distribution and fulfilling best practices from a regulatory world.

Now to get performance in this world we’ve created in our culture much more of a hedge fund model performance looking for the value drivers for growth and being able to function in a different way than mutual funds function. So with that we’ve asked the shareholders to align the interest of how we function in our culture with remuneration with their needs and we have found the number one need for shareholders is performance. There’s a small group that want expense ratios as a key factor for them and there’s a small group that your turnover and your tax efficiency, but the bottom line is Plato’s law, 80% of the interest of putting money in with our funds is performance. So with that we have basically gone to the shareholders and asked them to pay us an incentive fee when we beat an index, a benchmark, by 5%. And we are willing that if we don’t outperform that benchmark by 5% on a 12-month average, like a moving average, then we give up 25 basis points. With that it aligns the idea that shareholders come to us for fund performance that we are aligned in everything we do with that fund shareholder. So it’s very, very exciting for us to have basically a whole system that is performance inspired and I think that what I want to share with you is that so far the vote is coming in very, very well but most important is I believe it’s about 85% of those that have voted so far that we’ve been able to contact, 85% have said yes. That’s the important part of the slugging. And because the regulatory costs have gone up dramatically for proxies; these proxies are not cheap, they are very, very expensive, arduous, time consuming, send out postcards, we’ve retained the Altman Group that are doing a fantastic job polling all these shareholders, walking through it and explaining to them, but the best part is the shareholders as a whole are voting yes to the merger.

Now that merger’s also going to save us a lot of time because right now we duplicate board meetings. We have to duplicate board books. A huge expense on time so that will streamline. The company will be much more efficient for the shareholders; it will make us much more effective and performance driven. So strategically, this is very, very significant moving forward for U.S. Global.

Terry Badger

With the cash and good financial position, would you consider a stock buy-back?

Frank E. Holmes

Yes, we would consider it. Just like we’ve looked at other deals to be able to buy with that cash, we will do things that are going to maximize the returns on capital. If the market gets silly, then we would look to buy back the stock. That’s all I can share with you.

Terry Badger

That wraps up the questions that we have for today. Thank you for those of you who did submit questions. This concludes U.S. Global Investors’ earnings webcast for fiscal year 2008. This presentation will be available for replay on our website at www.usfunds.com\webcast. And again thank you all for your participation today.

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