Two things got me thinking about mutual funds this morning. The first is a story I read in yesterday’s Globe and Mail, a Canadian newspaper, showing data from an academic study that says Canadians pay more in mutual fund fees than pretty much anyone else does on the planet. Why they put up with high fees is beyond me but that’s the beauty of a democracy. You’re free to make as many dumb mistakes as you want. The other thought was about an old saying – “if you want to get rich in mutual funds, buy shares in the mutual fund companies themselves and not the funds they manage.” Judging by recent earnings reports, companies that operate mutual funds don’t seem to be suffering a whole lot.
Fund companies come in all sorts of shapes and sizes. There is the stand-alone firm that does nothing but mutual funds. Then there is the large bank that offers funds as another way of capturing the clients’ assets. Brokerage houses offer their customers alternatives to stocks and bonds and then everything in between. Over 8100 mutual funds exist in the United Stares alone with over half of them investing in equities. That’s almost as many as the total number of stocks that trade on every American exchange including the pink sheets. The total assets under management are almost $11 trillion dollars among approximately 500 financial institutions. That’s an average of $20.8 billion per company. I think you get the picture.
I’ve laid out what most people already knew; the mutual fund industry is massive. There’s no disputing this fact. What I’m looking for here is a gem; a company that makes money for both shareholders and fund owners and I think I’ve found one. It’s U.S. Global Investors Inc. (GROW), a small asset manager in San Antonio with big fund returns. The company specializes in emerging markets and resource funds, with $4.59 billion in assets under management, at the end of March 2007; up from $3.78 billion in 2006. That’s an increase of 21 percent, a combination of existing assets appreciating and adding new money. With an increase in assets usually comes an increase in fees and the third quarter report confirms this with revenues up 7.6 percent. Unfortunately, this growth didn’t help the bottom line, which saw earnings per share in the quarter shrink by a penny to $0.16. Monday the shares dropped 17.5 percent on the news.
Why do I like about the stock if the earnings were down?
Jim Rogers, co-founder of the Quorum Fund with George Soros, is a big believer in emerging markets, and reluctantly I have to agree. America is slowly losing its hold on the world’s equity markets and the company is right in the middle of the action, managing six emerging market funds, three of which are in the resources sector. In addition, they continue to build their offshore clientele, growing assets in this area from $74 million last year to $240 million this year, an increase of 224 percent. I can’t say for certain but it appears to me that some of the increase in the selling, general and administrative expenses (up 40 percent in the quarter), which lowered profits, relates to the cost of building a larger offshore business. The next few quarters will tell me if I’m right.
Another reason I like the company is Ken Kam, founder of Marketocracy, wrote in his blog last Thursday that he was sticking with U.S. Global despite the fact it appeared its growth had temporarily stalled. His thinking was the stock price already reflected the flat line in the company’s growth and any dip after earnings would be temporary. Today’s trading would indicate he was probably correct in his assumption.
The name of the game in asset management is making money for your customers and US Global did that in 2006. For anyone who wants to diversify his or her investments beyond America, buy the stock and benefit from their ability to manage money in high-risk assets.
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