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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Skin-in-the-Game Investing: Why It Matters
March 9, 2015

To be successful in business and investing you've got to have skin in the game, a stake in the company. Warren Buffett

Seven hundred forty million dollars.

That’s how much Bill Gross has reportedly invested of his own cash into the bond fund he manages at Janus Capital Group. The billionaire bond king—who unexpectedly left Pacific Investment Management Company, or PIMCO, in September after a clash with senior management—now owns a little over half of the $1.45 billion fund.

This is likely the most extreme case to be found of a portfolio manager investing in his own fund—or “eating his own cooking”—but it’s certainly not the only one.

Bond-King-Bill-Gross-invested-740-million-in-fund-janusJackson Park Capital money manager Greg Jackson also has millions personally tied up in one of his firm’s funds. He likes to tell investors that when they go shopping for a fund, one of the decisive factors should be whether the manager invests in it himself. This shows that the manager has faith and conviction in the product.

“If I were a shareholder, that would give me pause [if the manager weren’t invested],” Jackson says. “Why is the fund good enough for me but not good enough for them?”

“A recent Wall Street Journal article takes the advice even further: “In the end, knowing that the manager has skin in the game isn’t the sole reason to choose a fund, but it makes sense as a basic criterion or a tiebreaker for selecting between two funds.”

Following this line of thought, Jackson is attracted to companies whose CEOs, officers and other corporate insiders are bullish on their own stock.

“You care a lot more if there’s skin in the game,” Jackson says.

This sentiment is shared by Catalyst Funds portfolio manager David Miller, who even designed a fund that seeks to invest only in companies whose officers are buying shares of their own stock on the open market.

“There are some strong correlations between what the insiders are doing, where the stock is going and its future thereafter,” Miller explains. “They know whether there are going to be earnings or if a company will be acquired. You can also see what they are actually doing with their own personal funds.”

Take Elon Musk, founder and CEO of Tesla Motors.  On May 30, 2013, Musk purchased over $100 million worth of his own company’s stock. Since then, it’s climbed more than 100 percent, compared to the S&P 500 Index’s return of 27 percent.

CEO Elon Musk Purchased $100 Million in Tesla Stock on May 30 2013
click to enlarge

You do the math of how much Musk has made on his investment.

Consider also Warren Buffett. Writing in the Berkshire Hathaway owner’s manual, Buffett reassures shareholders that “most of our directors have a major portion of their net worth invested in the company. We eat our own cooking.”

Speaking of Buffett, his annual letters to shareholders are always a treat, full of wit and wisdom that only someone of his brilliance and investing experience can articulate. The fiftieth anniversary letter was just released, which you can read here.

More recently, 89-year-old entrepreneur and philanthropist Alfred Mann altruistically put up $1 billion of his own capital to keep afloat his company MannKind, which manufacturers the groundbreaking Afrezza, an insulin treatment that diabetics inhale instead of inject. Mann is also involved with Second Sight Medical, which IPO’d in November. The company makes and sells advanced retinal implants that restore partial vision to the blind.

In October of last year, the Financial Times wrote: “Equity investors like to see that the chief executives of the companies in which they invest have a decent shareholding; they like to see remuneration packages that include lots of stock compensation.”    

Simply put, any kind of insider buying is typically a good sign. As Investopedia explains:

Executives can talk all they want, but the best vote of confidence is putting one’s own money on the line just like outside investors!

Walking the Walk

USGI's Portfolio Managers Have Skin in the GameAt U.S. Global Investors, we not only share this philosophy but also practice it. Like Gross, Musk and Buffett, we have skin in the game, an expression that Buffett is often credited with coining.

More to the point, whenever one of our portfolio managers receives a performance bonus, half of it he gets in cash while the other half goes directly into the fund he manages.

As for myself, I’m invested in all nine of our funds, the most significant position being in our Near-Term Tax Free Fund (NEARX). On top of that, I’m also a U.S. Global Investors (GROW) shareholder. The information in the chart to the right is taken from our statement of additional information (SAI), and reflects that every one of our funds has at least $50,000 in portfolio management ownership.  

I believe it’s absolutely essential for our investment team, officers and I to have some skin in the game, to eat our own cooking, to feel the pinch when a fund disappoints and the exhilaration when it outperforms. Because we face the very same risks and rewards that our investors do, we’re motivated and incentivized to exert greater care and effort into the management of our funds.

And let’s be clear. Manager ownership is so much more than a symbolic gesture of faith in the product and empathy for the investor. Indeed, there’s empirical proof that such funds have tended to outperform those that have no manager investment, based on studies conducted by Morningstar, Capital Group and others.

Back in 2008, Morningstar’s Director of Fund Research, Russel Kinnel, set out to determine what percentage of managers nationwide owned a portion of their own funds. The results, as he described them, were “staggering":

Looking at the data, the figures that jump off the page are those where no one invested a dime. At U.S. stock funds, 47 percent report no manager ownership. And it gets worse from there. Fully 61 percent of foreign-stock funds have no ownership, 66 percent of taxable bond funds have no ownership, 71 percent of balanced funds put up goose eggs, and 80 percent of muni funds lack ownership.

At U.S. Global Investors, we eat our own cookingEighty percent! Of muni funds! I think it’s worth repeating that my largest position is in our firm’s muni bond fund, which has delivered 20 straight years of positive growth. Out of 25,000 equity and bond funds, only 30—NEARX among them—have been able to achieve such a feat.

Granted, the Morningstar data is seven years old, but it’s “staggering” nonetheless. Since 2005—three years prior to the study—the Securities and Exchange Commission (SEC) has required investment firms to disclose manager ownership in their annual SAIs. Given this level of transparency, you’d think more firms would encourage their managers to put some skin in the game.

Because putting your own money on the line usually fosters a greater sense of urgency and commitment to performance.

Kinnel reiterated the benefits of manager investment in a January 2015 interview:

We looked at ownership levels from five years ago and then performance over the ensuing five years to test out whether you would have had improved results if you had chosen along the lines of manager ownership, and it looks like you would have.

Below you can watch Kinnel’s entire interview with Morningstar.

If you missed my conversation with star portfolio manager John Derrick, be sure to watch the replay to learn how our NEARX fund has achieved 20 years of drama-free history during past stock market corrections and interest rate increases.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Total Annualized Returns as of 12/31/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Ratio After Waivers
Near-Term Tax Free Fund 3.07% 2.64% 2.98% 1.21% 0.45%

Expense ratio as stated in the most recent prospectus. The expense ratio after waivers is a contractual limit through December 31, 2015, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Past performance does not guarantee future results.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Near-Term Tax Free Fund as a percentage of net assets as of 12/31/2014: Berkshire Hathaway 0.00%, Capital Group International 0.00%, Janus Capital Group 0.00%, MannKind Corp. 0.00%, Pacific Investment Management Company 0.00%, Second Sight Medical Products 0.00%, Tesla Motors 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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Could Apple Buy a Third of the World’s Gold?
March 2, 2015

Is there anything Apple can’t do?

Thing gold. AppleFirst it revolutionized the personal computing business. Then, with the launch of the iPod in 2001, it forced the music industry to change its tune. Against initial market reservations, the company succeeded at making Star Trek-like tablets hip when it released the iPad in 2010. And in Q1 2015, a record 75 million units of its now-ubiquitous iPhone were sold around the globe. The smartphone’s operating system, iOS, currently controls a jaw-dropping 89-percent operating profit share of all systems worldwide, pushing the second-place OS, Google’s Android, down to 11 percent from 30 percent just a year ago.

As you might already know, the company that Steve Jobs built—which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX)—is history’s largest by net capitalization. In its last quarterly report, Apple posted a record $75 billion in revenue and is now sitting pretty on a mind-boggling $180 billion in cash. Many analysts believe the company will reach a jaw-dropping $1 trillion in market cap.

So what’s Apple’s next trick?

How about moving the world’s gold market?

iGold

Apple Watch Edition sporting a 18-karat gold caseThis April, Apple will be venturing into the latest wearable gadget market, the smartwatch, joining competitors such as Samsung, Garmin and Sony. All of the models in Apple’s stable of watches look  sleek and beautifully designed—just what you’d expect from Apple—and will no doubt be capable of performing all sorts of high-tech functions such as receiving text messages, monitoring the wearer’s vitals and, of course, telling time.

But the real story here is that the company’s high-end luxury model, referred to simply as the Apple Watch Edition, will come encased in 18-karat gold.

What should make this news even more exciting to gold investors is that the company expects to produce 1 million units of this particular model per month in the second quarter of 2015 alone, according to the Wall Street Journal.

That’s a lot of gold, if true. It also proves that the Love Trade is alive and well. Apple chose to use gold in its most expensive new model because the metal is revered for its beauty and rarity.

To produce such a great quantity of units, how much of the yellow metal might be needed?

For a ballpark estimate, I turn to Apple news forum TidBITS, which begins with the assumption that each Apple Watch Edition contains two troy ounces of gold. From there:

If Apple makes 1 million Apple Watch Edition units every month, that equals 24 million troy ounces of gold used per year, or roughly 746 metric tons [or tonnes].

That’s enough gold to make even a Bond villain blush, but just how much is it? About 2,500 metric tons of gold are mined per year. If Apple uses 746 metric tons every year, we’re talking about 30 percent of the world’s annual gold production.

India's Sripuram Golden Temple, the world's largest golden structure, is made out of 1.5 tonnes of goldTo put things in perspective, the Sripuram Golden Temple in India, the world’s largest golden structure, is made from “only” 1.5 tonnes of the metal.

TidBITS acknowledges that the amount of gold is speculative at this point. Two troy ounces does seem pretty hyperbolic. But even if each luxury watch contains only a quarter of that, it’s still an unfathomable—perhaps even unprecedented—amount of gold for a single company, even one so large as Apple, to consume.

Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), likens the idea of Apple buying a third of the world’s gold to China’s voracious consumption of the metal. As I mentioned last week, China is buying more gold right now than the total amount mined worldwide.

“If the estimates of how much gold each watch contains are close to reality, and if Apple’s able to sell as many units as it claims, it really ought to help gold prices move higher,” Ralph says.

But Can Expectations Be Met?

Here’s where this whole discussion could unravel. Although we don’t yet know what the Apple Watch Edition will retail at, it’s safe to predict that it will fall somewhere between $4,000 and $10,000, placing it in the same company as a low-end Rolex.

With that in mind, are Apple’s sales expectations too optimistic?

Possibly. But remember, this is Apple we’re talking about here. Over the years, it has sufficiently proven itself as a company that more-than-delivers on the “if you build it, they will come” philosophy. Steve Jobs aggressively cultivated a business environment that not only encourages but insists on “thinking different”—to use the company’s old slogan—risk-taking and developing must-have gadgets.

“Our whole role in life is to give you something you didn’t know you wanted,” says current Apple CEO Tim Cook. “And then once you get it, you can’t imagine your life without it.”

A perfect case study is the iPhone. When it launched in June 2007, the cell phone market was decidedly crowded. Consumers seemed content with the choices that were already available. Why did we need another phone?

Yet here we are more than eight years later, and as I pointed out earlier, 75 million iPhones were sold in the last quarter alone.

Apple iPhone Sales Reach Record Number in Q1 2015
click to enlarge

So it’s not entirely out of the realm of possibility for Apple to move 1 million $10,000 Apple Watch Editions per month.

Early in January I shared the following chart, which shows various analysts’ Apple Watch shipment forecasts for 2015, ranging from 10 million to 60 million units. Of course, all models are included here, not just the luxury model.

Estimated 2015 Apple Watch Shipments
click to enlarge

Looking at it now, many of the predictions seem a little understated. After all, Apple hasn’t released a dud product in at least two decades (remember the Newton?). Come April, we’ll see for sure what the demand really is—for the Apple Watch as well as gold.

Global Metals & Mining Conference

Last weekend I attended the BMO Metals & Mining Conference in Hollywood, Florida, along with Ralph, Brian Hicks, a portfolio manager of our Global Resources Fund (PSPFX), and junior analyst Alex Blow.

“Generally speaking, companies have streamlined operations and are focused on shareholder returns,” Brian said.

Alex came away from the conference with renewed conviction that the global climate is conducive for gold, citing central bank easing policies and increasing volatility in world currencies, both of which support the yellow metal’s performance.

“It looks as though gold has technical support and that a bottom has been reached,” he said. “If the eurozone really picks up, gold demand should rise, which would also benefit China since its primary gold export destination is the eurozone.”

Mark Your iCalendar

I invite everyone to join us during our next webcast, to be held this Wednesday, March 4, at 4:30 PM ET/3:30 PM CT. The discussion will center on our Near-Term Tax Free Fund (NEARX), which has delivered 20 straight years of positive returns. We hope you can make it!

 

Yes, sign me up for the webcast!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses.   For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637).   Read it carefully before investing.  Distributed by U.S. Global Brokerage, Inc.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund, Holmes Macro Trends Fund, Gold and Precious Metals Fund, World Precious Minerals Fund, Global Resources Fund and Near-Term Tax Free Fund as a percentage of net assets as of 12/31/2014: Apple, Inc. (3.52% All American Equity Fund), (5.37% Holmes Macro Trends Fund); Google, Inc. 0.00%; Samsung Electronics Co. 0.00%; Garmin Ltd. 0.00%; Sony Corp. 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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Global Airline Stocks Soaring, and Not Just Because of Low Oil Prices
February 12, 2015

The airline industry is notoriously competitive. There’s even an old joke: If you want to make a million dollars in the airline business, you need to start with two million.

That joke might have run its course, however, as carriers all over the globe have been posting some of the most impressive earnings in commercial aviation’s 100-year history.

Airplane flying through pink sunset. Jets. U.S. Global Investors.

Revenue growth in the U.S. was “unusually strong” in 2014, achieving the best margin performance in the past 10 years, according to management consulting firm Oliver Wyman. The Dow Jones U.S. Airlines Index grew more than 87 percent during the year, and we’ve seen global airline stocks, as measured by the NYSE Arca Global Airlines Index, gain significant ground since 2012 and reach all-time highs.

Global Airline Stocks Posting All-Time Highs - Jets - U.S. Global Investors
click to enlarge

Some investors might approach this rosy news with a dash of skepticism. Oil prices have fallen over 50 percent since the summer, after all, and conventional wisdom says that as soon as they start to rise again, airlines will be one of the first industries to be negatively affected.

Although it’s true that fuel is carriers’ top operating expense—they collectively spent $48 billion on fuel in 2013—there’s more to the industry’s recent bull run than the low price of oil. In fact, airlines are in a better position now to manage an increase in oil prices than they have been in recent memory, for a number of reasons.

Additional Seating

It only makes fiscal sense. The more seats an airline has, the greater the likelihood is of generating more revenue in airfare. The decision to increase seat density has helped carriers significantly lower their cost per available seat mile (CASM).

With greater seat density, carriers have had improved success at meeting and surpassing their breakeven load factors, or the necessary number of filled seats for companies to recoup operating costs. Currently, the breakeven load factor for large domestic airlines is 79 percent, meaning around three quarters of all available seats on every flight need to be filled. According to the most recent data from the U.S. Bureau of Transportation Statistics, the load factor was an exceptional 85 percent in 2014, an increase of 1.2 percentage points from the previous year and 12 percentage points from 10 years ago.

As you can see, this has resulted in the industry’s best annual performance for the 10-year period:

Domestic Airline Load Factor Exceeds Breakeven Load Factor - Jets - U.S. Global Investors
click to enlarge

Ancillary Revenue

Another way carriers have managed to beat expectations is through ancillary, or non-ticket, fees. Baggage fees, priority boarding, Wi-Fi, on-board meals and other fees are increasingly responsible for making up a large chunk of airlines’ earnings, allowing them to remain profitable in a highly competitive industry.

According to airline consulting group IdeaWorks, global ancillary revenue for 2013 was $31.5 billion. That’s up from $2.45 billion in 2007, which is about what Delta alone—which we own in our Holmes Macro Trends Fund (MEGAX)—generated in 2013 from such fees.

More so than major network carriers, low-cost value carriers increasingly depend on non-ticket fees to stay in the air, if you compare ancillary revenue as a percentage of total revenue in 2007 and 2013:

Ancillary Revenue as a Percentage of Total Revenue
Annual Results - 2013 Annual Results - 2007
Spirit Airlines 38.4% Ryanair 16.2%
Wizz Air 34.9% Vueling 14.2%
Allegiant Air 32.6% Allegiant Air 12.8%
Jet2.com 27.7% Air Deccan 9.0%
Ryanair 24.8% easyJet 8.8%

A Growing Middle Class

Arguably the most important factor contributing to airlines’ recent uptrend is the emergence and expansion of the middle class in the developing world. Air travel demand is strongly correlated with improved incomes. Spots around the world where we’re seeing some of the greatest surges in middle class growth are Africa, China, India and Southeast Asia.

Suvanaphumi Airport, Bangkok, Thailand. U.S. Global Investors. Jets.

This has led to advancement in worldwide revenue passenger miles, or the number of miles flown by commercial airlines. The most recent annual data from the Bureau of Transportation Statistics shows that over 1.1 billion miles were spent in the air in 2013, a 3.6-percent increase over the previous year.

The Organization for Economic Cooperation and Development (OECD) estimates that the middle class could increase from 1.8 billion people in 2010 to 5 billion in 2030.

Owing to a developing middle class as well as increased seat density and non-ticket fees, airlines are expected to post a collective profit of around $25 billion this year, up from $20 billion in 2014, according to the International Air Transport Association.

Also helping margins expand are low oil prices, which have stayed below $55 per barrel since the end of December. But even when prices do begin to rise, the industry should be in a good position to fly through the turbulence. 

Webcast

Registration for our next webcast, scheduled for February 18, is now available! Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing monetary easing policies in China and Emerging Europe.  Don’t miss it!

 

Sign me up for the webcast!

 

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Past performance does not guarantee future results.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Dow Jones U.S. Airlines Index measures the performance of the portion of the airline industry which is listed in the U.S. equity market. Component companies primarily provide passenger air transport. Airports and airplane manufacturers are not included.

The NYSE Arca Global Airlines Index is a modified equal-dollar weighted Index designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified as being in the airline industry and listed on developed and emerging global market exchanges.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund and China Region Fund as a percentage of net assets as of 12/31/2014: Delta Air Lines, Inc. 1.28% in Holmes Macro Trends Fund; Spirit Airlines 0.00%; Wizz Air 0.00%; Allegiant Air 0.00%; Jet2.com 0.00%; Ryanair 0.00%; Vueling 0.00%; Air Deccan 0.00%; easyJet 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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Building a Slam-Dunk Portfolio with Municipal Bonds
February 6, 2015

What do Johnny Unitas, Scottie Pippen and Mike Tyson all have in common?

If you said they’re former professional athletes, you win a door prize. The answer I was looking for is that all three ended up in bankruptcy court as a result of poor spending habits, bad investment advice or both.

Legendary quarterback Unitas lost big investing in restaurants, bowling alleys and real estate. Former Chicago Bulls star Pippen faulted his law firm for misguiding his decision to invest in a private jet. Meanwhile, Tyson, the former heavyweight champion of the world, squandered the more-than-$300 million he earned during his boxing career.

They’re not the only ones. In 2009, Sports Illustrated estimated that 60 percent of NBA players face bankruptcy just five years after retiring. For those leaving the NFL, that figure jumps to 78 percent.

To be fair, almost all of us have made investment decisions that didn’t pan out the way we had hoped. But the ugly truth is that when you’re successful and wealthy, you become the target of fraudsters and schemers. Just this Monday, in fact, a financial advisor pleaded guilty in federal court to accusations that he was plotting to defraud several NFL players.

Being scammed out of your retirement money or having to declare bankruptcy is a terrible thing for anyone to have to go through. But keep in mind that the typical career of a professional athlete is relatively short, lasting between three and five years. That means you have approximately 50 years’ worth of retirement to plan for.

So where do you start?

A Method to Preserve Capital

For high-net worth investors, a popular strategy to grow retirement money and receive tax-free income is through investment-grade municipal bonds—the very kind our Near-Term Tax Free Fund (NEARX) owns.

It’s true that for those who enjoy the high roller lifestyle, muni bonds don’t seem nearly as sexy as other investments such as restaurants and private jets.

But there’s nothing sexier than money, which is exactly what NEARX seeks to preserve through a diversified portfolio of high-quality munis with relatively short maturities. As you can see below, the higher the bond rating, the less likely it is for the issuer to default. Eighty percent of NEARX’s holdings fall into one of the four highest ratings. 

Muni Bond Issuers' Cumulative Default Rates by Initial Moody's Rating
click to enlarge

Many loyal readers are probably familiar with the following chart, which has been modified to reflect the investment goals of someone with a lot of wealth. If he or she were to have invested a hypothetical $1,000,000 into an S&P 500 index fund in January 2000, it would have taken almost 14 years for it to catch up to and surpass a similar investment in NEARX.

Near-Term Tax Free Fund vs. S&P 500 Index
click to enlarge

Although we can’t guarantee how the fund will perform in the future, NEARX has historically shown a greater likelihood of dodging the dramatic swings and volatility in the equities market, similar to the ones we experienced during the first decade of the century—the dotcom bubble, for instance, and the Great Recession. And there will be times, of course, when products such as an S&P 500 index fund will strongly outperform NEARX.

The fund holds five stars overall from Morningstar, among 173 Municipal National Short-Term funds as of 12/31/2014, based on risk-adjusted return. That’s one star for every championship title our San Antonio Spurs have brought home to the Alamo City.

NBA Championship Trophies NEARX 5-stars

NEARX has also delivered an astounding 20 straight years of positive returns. For a majority of those years—since 1999—it’s been expertly managed by our director of research, John Derrick.

Near-Term Tax Free Fund Annual Total Return
click to enlarge

This is a rare achievement indeed.

So rare, in fact, that out of 25,000 equity and bond funds, only 30 have accomplished the same feat of delivering positive returns for 20 straight years, according to Lipper. As such, NEARX enjoys one of the most envied track records among its peers—just like the Spurs.

USGI in Sunny Orlando

As I write this, John is in Orlando, Florida, attending the World Money Show, where he’ll be discussing NEARX’s 20-year history of outstanding performance. The event is free, so if you’re in the area, come drop by and visit us at booth 514

 

Request more information on our Near-Term Tax Free Fund!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Morningstar Rating

     Overall/173
     3-Year/173
     5-Year/142
    10-Year/103

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-term funds
Through: 12/31/2014

Total Annualized Returns as of 12/31/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fun (NEARX) 3.07% 2.64% 2.98% 1.21% 0.45%
S&P 500 Index 13.69% 15.45% 7.67% n/a n/a

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through December 31, 2015, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

A bond’s credit quality is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C).

Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user's own risk. This is not an offer to buy or sell securities.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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Currency Wars Heat up as Central Banks Race to Cut Rates
February 2, 2015

Frank Holmes in Zurich holding a gold barThe Chinese Year of the Ram will kick off at the end of this month, but for now it looks as if 2015 will be the Year of the Central Banks.

I spend a lot of time talking about gold, oil and emerging markets, and it’s important to recognize what drives these asset classes’ performance. Government and fiscal policy often have much to do with it. But in the past three months, we’ve seen central banks take center stage to engage in a new currency war: a race to the bottom of the exchange rate in an attempt to weaken their own currencies and undercut competitor nations.

Indeed, amid rock-bottom oil prices, deflation fears and slowing growth, policymakers from every corner of the globe are enacting some sort of monetary easing program. Last month alone, 14 countries cut rates and loosened borrowing standards, the most recent one being Russia.

A weak currency makes export prices more competitive and can help give inflation a boost, among other benefits.

“The U.S. seems to be the only country right now that doesn’t mind having a strong currency,” says John Derrick, Director of Research here at U.S. Global Investors.

Since July, major currencies have fallen more than 15 percent against the greenback.

U.S. Dollar CLimbing HIgher Against Other World Currencies
click to enlarge

Two weeks ago, Switzerland’s central bank surprised markets by unpegging the Swiss franc from the euro in an attempt to protect its currency, known as a safe haven, against a sliding European bill. Its 10-year bond yield then retreated into negative territory, meaning investors are essentially paying the government to lend it money.

This and other monetary shifts have huge effects on commodities, specifically gold. As I told Resource Investing News last week:

Gold is money. And whenever there’s negative real interest rates, gold in those currencies start to rise. Whenever interest rates are positive, and the government will pay you more than inflation, then gold falls in that country’s currency. Last year, only the U.S. dollar had positive real rates of return. All the other countries had negative real rates of return, so gold performed exceptionally well.

Other countries whose central banks have enacted monetary easing are Canada, India, Turkey, Denmark and Singapore, not to mention the European Central Bank (ECB), which recently unveiled a much-needed trillion-dollar stimulus package.

U.S. Dollar CLimbing HIgher Against Other World Currencies

Gold bears are puzzled as hedge funds raise bullish gold bets.A recent BCA Research report forecasts that as a result of quantitative easing (QE), a weak euro and low oil prices, the eurozone should grow “by about 2 percentage points over the next two years, taking growth from the current level of 1 percent to around 3 percent. This is well above the range of any mainstream forecast.” The report continues: “[European] banks, in particular, are likely to outperform, as they will be the direct beneficiaries of rising credit demand, falling default rates and the ECB’s efforts to reflate asset prices.” This bodes well for our Emerging Europe Fund (EUROX), which is overweight financials.

Speaking of oil, the current average price of a gallon of gas, according to AAA’s Daily Fuel Gauge Report, is $2.05. But in the UK, where I visited last week, it’s over $6. That’s actually down from $9 in June. You can see why Brits don’t drive trucks and SUVs.

But that’s the power of currencies. As illustrated by the clever image of a Chinese panda crushing an American eagle, China’s economy surpassed our own late last year, based on purchasing-power parity (PPP).

China's Economy Surpasses the U.S.'s Based on Purchasing Power Parity
click to enlarge

Burgerology: Price of a Big Mac as of 2015Financial columnist Brett Arends puts it into perspective just how huge this development really is: “For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.”

An easier way to comprehend PPP is by using The Economist’s Big Mac Index, a “lighthearted guide to whether currencies are at their ‘correct’ level.” The index takes into account the price of McDonald’s signature sandwich in several countries and compares it to the price of one here in the U.S. to determine whether those currencies are undervalued or overvalued. A Big Mac in China, for instance, costs $2.77, suggesting the yuan is undervalued by 42 percent. The same burger in Switzerland will set you back $7.54, making the franc overvalued by 57 percent. 

Earning More in a Low Interest Rate World

From what we know, the Federal Reserve is the only central bank in the world that’s considering raising rates sometime this year, having ended its own QE program in October.

Last month we learned that the Consumer Price Index (CPI), or the cost of living, fell 0.4 percent in December, its biggest decline in over six years. We’re not alone, as the rest of the world is also bracing for deflation:

Global Consumer Price Index (CPI) Trends
click to enlarge

Following Fed Chair Janet Yellen’s announcement last Wednesday, the bond market rallied, pushing the 10-year yield to a 20-month low.

U.S. 10-Year Bond Yield Dips to a 20-Month Low
click to enlarge

Interest rates remain at historic lows, where they might very well stay this year. But when they do begin to rise—whenever that will be—shorter-term bond funds offer more protection than longer-term bond funds. That’s basic risk management. We always encourage investors to understand the DNA of volatility. Every asset class has its own unique characteristics. For example:

The Longer the Maturity, the Greater the Price Volatiity
click to enlarge

Our Near-Term Tax Free Fund (NEARX) invests in shorter-term municipal bonds, thereby taking off some of the risk if the Fed decides to raise rates this year. We’re very proud of this fund, as it’s delivered 20 years of consistent positive returns. Among 25,000 equity and bond funds in the U.S., only 30 have achieved the feat of giving investors positive returns for the same duration, according to Lipper.

That equates to a rare 0.1 percent, roughly the same probability that your son or grandson will be drafted into the NFL and play in the Super Bowl.

In the past 30 years, we’ve experienced massive volatility in both the equity and bond markets, and we’re thrilled for our shareholders that we’ve been able to deliver such a stellar product, under the expert management of John Derrick. What’s more, NEARX continues to maintain its coveted 5-star overall rating from Morningstar, among 173 Municipal National Short-Term funds as of 12/31/2014, based on risk-adjusted return. If you are in Orlando next week, come by the World Money Show to hear John talk about the fund’s history of success. The event is free and my team would love to meet you at booth 514.

Request more information on NEARX today!

 

Upcoming Webcast

To those who listened in on our last webcast, “Bad News Is Good News: A Contrarian Case for Commodities,” we hope you enjoyed it and received some good, actionable insight. If you weren’t able to join us, you can watch the webcast at your convenience on demand. Our next webcast is coming up February 18 and will focus on emerging markets, China in particular. We hope you’ll join us! We’ll be sharing a registration link soon.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Morningstar Rating

     Overall/173
     3-Year/173
     5-Year/142
    10-Year/103

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-term funds
Through: 12/31/2014

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user's own risk. This is not an offer to buy or sell securities.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund and Near-Term Tax Free Fund as a percentage of net assets as of 12/31/2015: McDonald’s Corp. 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change