U.S. Global Investors, a boutique registered investment advisor, plans to stick to its knitting, developing mutual funds that specialize in natural resources and emerging markets despite the overwhelming trend toward exchange-traded funds that would require the company to make acquisitions.
The San Antonio-based company’s assets under management rose 25.1% from a year earlier to $2.66 billion in its fiscal second quarter, which ended Dec. 31, but this trailed the 39% average annual growth in assets for its industry peers, including BlackRock Inc. [BLK], Affiliated Managers Group [AMG], Calamos Asset Management, Cohen & Steers, Federated Investors Inc. [FII], Franklin Resources [BEN], Invesco, Janus Capital Group [JNS], Legg Mason [LM], T. Rowe Price [TROW] and Waddell & Reed.
Frank E. Holmes, U.S. Global’s [GROW] chief executive officer and chief investment officer, said during an earnings conference call on Friday that a lot of this growth from competitors can be attributed to the surge in ETFs, which became a $1 trillion sector earlier this year. He said U.S. Global’s long-term strategy is better than “being lucky for one quarter or one year.”
“Our general thought on ETFs is that it is the hot sector to be in, but we’ll outperform them with active money management and strong performance. Long-term thinking is the key,” he said.
U.S. Global will continue developing its own mutual funds, Holmes said, but will continue to consider an acquisition to enter the ETF space.
“We’ve done a fair amount of research and found that if you are not first out of the box [with an ETF] for a particular asset class it is hard to get traction,” he said. “You need distribution with a broker network in that marketplace. With that in mind, and without us having a huge wholesaling infrastructure, we have looked at acquiring. … but anything would need to be accretive to earnings.”
Holmes said the company has “gone through the process and nothing has materialized” yet. He said the company doesn’t want to make an acquisition that would “impair the balance sheet or put the company at risk.”
Catherine Rademacher U.S. Global’s chief financial officer, said the company has $22 million of excess capital available “to take advantage of opportunities that may arise and to weather volatility storms.”
Holmes said much of the financial crisis can be attributed to “overleveraged financial athletes” that “were on steroids.”
“It will take many years for these overleveraged entities to get their mojo back,” he said. While that occurs, he said, U.S. Global will look to expand.
The company plans to continue to develop its natural resources and emerging markets investment strategies. Rademacher said assets under management increased in both segments considerably last year as the company had its fifth consecutive quarter of revenue and earnings-per-share growth.
Holmes said there are significant opportunities to invest in China and India as the middle class continues to grow in these markets.
U.S. Global will also look to continue to develop its presence in the institutional sector. Susan McGee, the company’s president and general counsel, said that institutional assets under management increased 76% in 2009. “These investors control larger pools of assets and make decisions based on performance, but also on process and investment management,” she said.
On Thursday, U.S. Global reported that its earning rose in its fiscal second quarter to $1.5 million, or 10 cents per diluted share, on revenue of $9.0 million. A year earlier, the company reported a net loss of $1.7 million, or 11 cents per diluted share, on revenue of $2.8 million.
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