U.S. Global Investors, Inc.
Q1 2019 Earnings Call Transcript

Published: 9 Nov 2018

[Holly Schoenfeldt:]

Good morning, and thank you, for joining us today for our webcast announcing U.S. Global Investors’ results for the First Quarter of Fiscal Year 2019. I’m Holly Schoenfeldt. If you have any questions during the webcast, you can enter them in the questions area of the control panel side bar, which is normally to the right of your screen. Also, you may download a PDF of today’s slides by clicking on the red handout button. The presenters for today’s program are Frank Holmes, U.S. Global Investors CEO and Chief Investment Officer; Lisa Callicotte, Chief Financial Officer; and myself, Holly Schoenfeldt, Marketing and Public Relations Manager. 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 the corresponding Form 10-Q 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. Now, let’s go to Frank Holmes, CEO and CIO, for an overview of the period. But really briefly let me go over about GROW before I pass it on. U.S. Global Investors is a innovative investment manager with vast experience in global markets and specialized sectors. We are founded as an Investment club, the company became a registered investor adviser in 1968 and has had a long-standing history of global investing and launching first-of-their-kind investment products, including the first no-load gold fund. U.S. Global is well-known for expertise in gold and precious metals, natural resources, and emerging markets. Frank?

[Frank Holmes:]

Well, thank you, Holly. I’ll give you an interesting history that’s taken place in San Antonio, Texas, is USAA, which is a fantastic company, had sold their fund business, their mutual fund business. And I think what’s interesting is that they started a gold fund because they had so many military people call them and ask them about our gold fund. Because our goal fund, the first-no load gold fund was created by a colonel from the air force, who fought in World War II, Colonel Clark Aylsworth, and he had built this investment club that became a mutual fund as a big believer in gold. And I think that’s so interesting that now we’re still in here and USA is getting over the fund business. But it’s been a tough goal. I’m going to try to talk through some of our strengths and challenges we’re all dealing within the fund industry as a whole. But the big strengths for our survivorship is strive to be the go-to stock for exposure in emerging markets and resources and then expanded that into digital currencies, which has become – as gold is always a form of money, the fourth most liquid asset class in the world, digital currencies has grown, still owning a dwarf and then compare it to the gold markets or the cash markets, but growing. We’re debt free. We have a strong balance sheet and we have this reflexive cost structure and we have a monthly dividend return on equity discipline. I want to think our top institutional holders, in particular Royce Funds have been up and down and they themselves have experienced the contraction in active fund management that’s taken place and I’m going to comment about cheaper is not better. And Financial & Investment Management Group out of Michigan, they’ve been just great long-term investors. And so, I thank them for their support. And we have The Vanguard Group and the Blackrock, which is, we all know they are indexing funds. The other interesting part is Perritt Capital Management come back in. They’re small cap, micro cap and they’re contrarian and they run a great shop and I want to thank them for looking at GROW as a way to play – another way to play the gold space. Dividends, we consistently paid for more than 10 years. The yield is 2.16%. It’s a small number, but as a consistency that’s important. We do have a repurchase program at motion. And the board has approved just to buyback $2.75 million and for the quarter ended we bought very little because the volatility is – our model of buying back GROW stock is based on the volatility and the greater the volatility, the more stock we buyback on a day – if it’s on a daily basis this model. So we bought very little back. So it means basically the price action has declined with the cryptocurrency world and the goal world, but it’s not as volatile as it was a year ago. And we may spend and discontinue it at any time as the normal disclosure goes with a stock buy back. So this next one is a visual showing our balance sheet and we’re going to probably spend more time and you can see in the press release on investment in HIVE Blockchain and its impacts. And there’s some changing accounting, which I’ll leave it over to Lisa Callicotte, our treasurer to be more articulate in explaining. But there’s a big movement that has taken place since 2007, 2008 to go to mark-to-market and it was part of the FASB 157, they called it. And when FASB 157 one five seven was being implemented, uh, it, it created lots of, a dislocation of capital in the capital markets and so they were suspended in March of 2009, was basically the turning point for the capital markets to bull market, the start. And, so now it’s coming back, it eking its way back into the system. And this is important to recognize is probably an easier way of dealing with it, but it does create disruption increase of volatility in your earnings and your cost flow. But our balance sheet as you can see, most important is still remains healthy and robust. And we’re looking at how do we streamline the costs, as we’ve our selves have outsourced a lot of our heavy costs and our building now, which is a one time was a huge, huge win for us because it was a lot cheaper to have our building than it was to be leasing. And now we’re looking to lease out more or sell the building so that we just need less space. So, we’re this reflexive cost structure and that’s how we’re looking at these capital markets. In that interim, we still have to deal with what takes us a cycle for leasing out or selling a building or making a long-term investment just takes time. But every quarter, every quarter, every 90 calendar days, we have to pump out a earnings and cashflow. And, so there’s some volatility that takes place with this as you can see, that we’ve had to take an $0.08 to hit. Most of this had to do with the new accounting rules of how a long-term investment we made all of a sudden has to show up short-term. But let’s take a look at the next one, as the assets continue to slowly just seem to dribble out. It doesn’t help when you have gold, going through an advent 18 months ago, we had a big event with VANECK as gold ETF which seems to capture most of the assets even though we’ll perform it. They had a that was very disruptive in selling billions of dollars with the gold stocks in a short period of time because all the money, it seemed to go into this ETF of the gold money and it wasn’t in active management which is more diversified for investors and for the overall ecosystem of the gold equity market. It all became concentrated and that concentration, all of a sudden that they sort of owning more than 20% of companies and because of that they’d have to do take over. So, what did GDXJ had to do – blow up these names. And that really hurt a lot of the gold stocks. And that hurt our performance too and then we’ve added again this past September with VANECK getting out of the gold equity business. So it seems to be these sort of one-offs and everyone getting out of it as this maybe as a turning point, I do not know for sure, but it seems to have that smell to it, of, when VANEK lost sort of VANEK and vanguard, the Bs of the world made this transition of getting a change to their gold name. Now they’re getting out of gold, gold equity business period. So it does impact our gold funds, but I’m happy to say that, we continue to perform and that’s the most important part. It is flipping up and flying at 35,000 feet in the air. As to give you an idea what’s happened this past decade, the regulatory push, the marketing push of indexing, indexing. You can see this actively fund managers have seen $2 trillion is the number. I’ve read from both institutions and mutual funds. That have gone into some form of indexing. And so there’s this rotation and it really doesn’t matter if you’re active fund manager and you will perform the index and the S&P 500, it doesn’t matter. Money is still going into them because of the thought process is cheaper, is better, we know that’s not true because otherwise there’d be no luxury goods and everyone would be wearing Walmart clothes, and everyone would be buying cheap in the marketplace. So that’s just not true. But in the financial markets, there is a push for this and there’s no regulations, in the car industry per se, at it you have to go and push cheaper is better or in luxury goods. So, we do see the sort of transition and it’s what it is. And that’s part of the reason why the USAA has sold their Fund Business. And the valuations on those assets are less than 1%. And that’s what is taking place in this sort of industry. So are we headed for a passive index meltdown? I’ve commented this on the goal, when you get what’s called a crowded trade, all the money goes into one ETF, then it becomes very disruptive to the overall ecosystem of raising capital, performing, et cetera. And it has nothing to do with the value metrics of picking a stock. It all has to do with can you capture the direction of the fund blows, because the funds are going to buy anything that’s in that space. I’ve written about extensively that there are more indices and there are public companies that the IPO market has shrunk by 50% and with normal M&A work that the overall number of stocks to buy is shrinking, but money keeps pouring into the S&P 500. And the vanguards and the black rocks of the world are offering products that are free, or next to nothing, but they still have to pay their legal bills. And I am pleased about the fact that I can’t sell you, induce you to buy our funds with a toaster, but I can induce with no fees. So that inducement of no fees is creating a very crowded space which will become a difficulty and always has been when it becomes crowded. I’m noticing opportunities in the gold markets where I’ve written that earlier this year that everyone was short of the gold market and historically we get a big rally from that. So what this visual is trying to show you is that in the past little period the percentage of assets leaving active and going into indexing continues to grow. And I don’t know at which stage it will be, but cheaper is not better. The next visual is showing a raise to the bottom as the seismic shift in indexing has come with some unexpected consequences, including price distortion. Buying cheap often comes with a high price to the long run. There is no free lunch is sort of things I’ve heard. But I do have this sort of big concern because if you think about this year that $1 trillion of stock buyback is taking place. That means in the S&P 500, the liquidity has to be shrinking, but every day people are leaving to go and buy the S&P 500. And when the pension funds, et cetera, all want to rebalance, sell the stocks to buy bonds, what’s going to happen? You’re going to get what took place in 2000 when you had the tech bubble, they call it was also a fact that Dell computers, et cetera had small market caps and people just couldn’t rebalance and you had this crash that took place. So I think we have to be just cognizant that in coming January of this year, there is a greater risk of this rebalancing that the ability to sell shares by the indexes to rebalance the portfolio and the underlying holdings, this is not there. So I think there’s got to be some push for active management. And it also had its impact in distorting capital that all the adventure capital doesn’t go into small cap or microcap. A lot of money banks have found money bank brokers who won’t give you margin for stocks that are $10, they won’t let you buy a market cap under $200 million. So therefore where companies go to raise capital for their new growth idea, the new Apple idea, the new cable operators start with penny stocks in Denver that are now the biggest cable companies in the world, when you think of some of these companies with sheer magnitude. So this distortion is going to have its impact. But we remain steadfast in being the microcap we are and looking for opportunities. And I think it’s interesting at Wells Fargo, so that lifecycle market characteristics could present many opportunities for investors, who will hold high quality active managed funds. I’m a big believer of that. I know that Vanguard got, we’ve got other gold fund business. And we looked at our first no-load gold fund in America and it’ll perform the Vanguard gold fund for one, three, five and 10 years. But the Vanguard gold fund was much bigger. Why because it’s cheaper, it’s cheaper and it’s on the platforms. All over the platforms being, its better and no, it’s just not true. Usually people go to sports teams and watch sports teams for performance and that’s what happens in active management. But as Warren Buffett says, only when the tide goes out to discover who’s been swimming naked, and it remains cautious, unbalanced risks. So, but in this whole end of it, in this sort of bear market we dealt with, we continue to share insights in the financial media and continue to be research and write and comment, regarding what’s happening in the capital markets on a timely basis. And I always shock people when I did remind them, did you know that for the past decades, this – beginning of this century, gold reserve performance stock market 2

[Lisa Callicotte:]

Thank you, Frank. Good morning. Before I summarize, our results of operations, I’d like to discuss, the investment accounting pronouncement that we adopted this quarter. Slide 34 notes, changes in the accounting role related to our investments. And that are expected to cause our earnings to be more volatile. We adopted accounting standard, update ASU 2016-01, recognition and measurement of financial assets and financial liabilities effective July 1, 2018. ASU 2016-01 updating accounting standards codification, subtopic A-25 or ASC A-25. This amended the guidance on the classification and measurement of investments in equity securities and certain disclosures. So starting in this fiscal year, some of our corporate investments were accounted for differently than in the past. As part of the adoption of the new standard, we made required cumulative effective adjustment and reclassified $3.1 million of unrealized net gains and a million of related deferred tax expense out of accumulated comprehensive income and into retained earnings. There no longer is an available for sale security or – I’m sorry. They’re no longer is an available for sale classification for equity securities with readily determinable fair value. Effective July 1, 2018, changes in fair value of these investments formally classified as available for sale are reported through earnings rather than comprehensive income. This includes any changes in market value in our investment in high. The impact to earnings for this change for the quarter ending September 30, 2018 with an investment loss of $954,000. This loss related to declines and unrealized gains of securities formally classified as available for sale and previously would have been recorded in other comprehensive income rather than investment income, of that amount $987,000 related to a decline in market value in our investment in HIVE. And then we had an investment laws related to HIVE for this quarter, at quarter end the market value of the company’s investment in HIVE was approximately $2.2 million higher than our costs. What shareholders should try to understand is that no matter if an investment is short-term or long-term in nature, the change in market value will be will be recorded quarterly causing our investment income to be more volatile. Slide 35 summarizes our investment in HIVE and at September 30, 2018, the investment in HIVE wasn’t included in investments and securities at fair value, noncurrent on our balance sheet. We owned 10 million shares of HIVE, which is approximately 3% of the outstanding shares at quarter end. The cost of the investment was $2.4 million and the market value at September 30, 2018 was $4.6 million. Now I’ll discuss the results of operations for our quarter ending September 30, 2018. Beginning on Page 36, we know that we recorded operating revenues of $1.2 million for the quarter, which is a decrease of $267,000 or 18% from the $1.5 million in the same quarter last year. The decrease was primarily due to a decrease in assets under management related to market depreciation and shareholder redemption. Operating expenses for the quarter were $1.9 million, a decrease of $63,000 or 3%, primarily due to the following reasons

[Holly Schoenfeldt:]

Thank you, Lisa. As you can see a majority of our mutual fund assets are in emerging markets and natural resources, while 35% are in domestic equities and fixed income. As for distribution, more than three quarters of assets come from retail investors and the other quarter from institutional investors. Our sales and marketing efforts have continued to focus on our mutual funds, including those concentrated on gold, natural resources and emerging markets, as well as our exchange traded funds. The company and our funds continue to receive an invaluable amount of viral publicity gained through media interviews. Frank Holmes often shares his insights with financial outlets like CNBC Asia, Bloomberg Radio and Kitco News just to name a few. We continue to receive recommendations by influential financial newsletter writers as well, along with sharing and syndication of our award-winning original content by third-party publishers. The newsletters have a loyal following and receive millions of visitors each month. Frank Holmes’ CEO blog, Frank Talk continues to grow in popularity as well. His commentary is often featured by prominent publications including Forbes, Seeking Alpha, The Crest and Business Insider with millions of monthly visitors. We like to call Frank Holmes our globetrotter because he along with others on our investment team travel around the world to share our thought leadership. We also interact frequently with our loyal followers through Facebook, Twitter, LinkedIn, Instagram, YouTube and Pinterest. Last December, we launched a new video series to supplement our award-winning Frank Talk Blog. Frank Talk Live features Frank Holmes as he dives into market moving events of the week and shares his thoughts on trending financial topics. We feature other members of our investment team as well in similar video short clips. Since implementing these new videos, we’ve already witnessed syndication to several third-party sites as well as an increase in subscribers to our YouTube Page and investor alert newsletter. Kitco News is the biggest gold website in the world with an audience of over 30 million monthly visitors in partnership with The Street continues to feature the Gold Game Film Show with Frank Holmes’ gold market analysis. And since the show’s beginning, 152 episodes have aired. At quarter-end, we’d like to look into the most visited Frank Talk Blog post over the last year, no matter what year they were actually written in. So on this slide, you will see that the most visited articles include

[Frank Holmes:]

No, I just add to that Holly is the 43,000, it’s in 180 countries. And a lot of them are accredited – most of them accredited investors and hedge funds. I know when I’m traveling abroad, this hedge fund managers come up and talk to me, their subscribers.

[Lisa Callicotte:]

Yes, exactly. Investors can sign up for any of these that usfunds.com and join these subscribers to receive our award winning investor alert e-newsletter as well as print tasks. And as we are about to wrap up today’s presentation, we just want to offer attendees of the live webcast the opportunity to drop us a line. We love hearing from our shareholders and our subscribers. So, if you’d like a Free Enjoy Capitalism T-shirt, please shoot us a quick note to [e-mail] after today’s presentation. And now we would like to open it up to questions and as a reminder, you can enter the questions into the control panel on your screen and I have a few to start-off with, Lisa, I think you might like to answer this one. It says, you explained that the New Accounting Standard now requires due to include changes in fair value of investment in the income statement starting this quarter, where are the gains/losses as of the implementation date included? Well, the accounting rule change required companies to implement this change by wherever they were as of the transition date and for us that was July 1st, and moved – move any unrealized gains and losses into retained earnings. And then going forward, record that through our income statement. So we reclassified $3.1 million in unrealized gains in a million and related deferred tax expense from accumulated other comprehensive income into retained earnings as of July 1. So we moved that unrealized gain from one equity account to another equity account. But what is important to note is that those unrealized gains, the $3.1 million as of 6/30/2018, will never run through our income statement, but we are going to have to record any changes from that point on through our income statement quarterly.

[Frank Holmes:]

I think the big part was this came out two quarters ago, these changes with Berkshire Hathaway that they had a $1 billion charge for – something volatile to this according to this?

[Lisa Callicotte:]

Yes. So most companies, they would be implementing it in their first quarter. This just so happened to be our first quarter for fiscal year 2019 which is why it’s happening to us now.

[Frank Holmes:]

Just started showing up and I believe and I talk with the others, they said that many of the financial companies and particularly the insurance companies were making long-term and short-term investments, its caused by the disruption and to increase the volatility.

[Lisa Callicotte:]

Definitely.

[Frank Holmes:]

Of the earnings, the short-term earnings. The biggest risk and all of that long-term is we’ll let deter people from making long-term investments, you’ve all of a sudden has to create in short term volatility to your earnings, and that’s hopefully investment take place.

[Lisa Callicotte:]

Great. Frank, maybe you can answer this question. It says, it seems like the crypto currency market has been in a low. Do you think the price range right now, is the new normal or do you see more upside potential moving forward?

[Frank Holmes:]

We saw it in July. It was anticipated that G20 were coming up with the regs and we had a big surge, 10% a day, and hive and roll, pop, pop, pop, and then all of a sudden new announcement that lay into October and everything rolling over. So, I think that once we get some clarity on the regulatory world, then I think if the reset button, it’s going to be like gold, it’s kind of just search and it is the complete different ecosystem and that ecosystem is a trade 24/7. And so how people look at it, it’s the millennial world is very different in my research and going around it that decent, a lot of these young kids, it was calculated that there was 10,000 lineal millionaires from Ethereum. And many of them had their knapsacks on. They go on to travel the world and they don’t want to pay taxes. So find, it’s the weirdest part of us as a group of people, but they have a global ecosystem. I know for three mellowness $30,000. So there’s a – that our coders that are involved, they have conferences. These conferences are packed every week. I just – if this was in gold and gold fell from $1,300 to $200 like Ethereum, there’d be no one in the world having a gold conference. But there are conferences everywhere and they’re spending thousands of dollars that I’ve attended and spoken at several in the past three months. So I know think that energy is gone away. I think we’re groping with this fair market and I think it’s nice that it’s been going sideways. The big headaches that you have – during the mining business, the challenges you have is these hash rates, the cost of mining is getting – it’s just the chips have fallen dramatically. So what high when it would to spend money last year and buy, that’s a A6 chips combine these coins, these chips are costing $2,100 a chip, they’re now 400. And so that has, that means more players can come in. But a lot of players have just basically let in the woods. They have no money to come in, they never redeployed and continued their investing. So I think that – what we’re seeing is that this is much more like fracking natural gas. That the frackers start off and let’s say is oil and they hit a 1000 barrels a day in South Texas. A year later, it’s 50 barrels a day. So they continuously have to maintain the 1000 barrels a day. They have to conducing their cash flow and by drill more and drill more and drill more. And then they get into that treadmill, they can keep that production up and they can have great positive free cash flow from it. But that’s what you have to be thinking off in that space. So I think that in a New York second, this thing can change with govern regulations. I think it’s finding the bottom here and a lot of people are now leaving the industry. I know that Genesis Mining, which they sells are things on the cloud that was biggest in the world, it’s slowed down. People are all momentum traders. They all want to subscribe to have their own clients. It’s on a momentum. So I think that as long as it’s here, the more getting washed up.

[Lisa Callicotte:]

All right. This concludes U.S. Global Investors webcast for the first quarter of 2019. The presentation will be available on our website at usfunds.com. Thank you all for your participation today.