2013 vol. 2 next chapter - u.s. global investors€¦ · these days, 90-day treasury bills are...

Shareholder Report2013 Vol. 2

China’s Fast Track | Landslide Shifts Copper Supply

Next Chapter Turkey’s History

in

2 Volume 2, 2013 • www.usfunds.com

INSIDE

We want to hear from you. Send your questions, comments or suggestions for the Shareholder Report to [email protected]. For account information, call 1-800-US-FUNDS (1-800-873-8637) or email [email protected].

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.All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The funds did not own Rio Tinto as of 3/31/2013. 13-239

www.usfunds.comThe arrow inside means you can find expanded coverage online.

Istanbul, Turkey

Letter from the CEOCapital formation is changing. Is your porfolio ready?

About the Cover:With its cascading domes and minarets topped with

gold-plated copper, Istanbul’s Sultan Ahmed Mosque is a classic example of Turkish

architecture. Built in the early 1600s during the rule of Ahmed I, it is nicknamed the

Blue Mosque because many of its 20,000 tiles that surround the interior are painted blue. Its six minarets are unusual, but according to one story,

the Sultan told his architect to make gold (“altin”) minarets, which was misunderstood as

six (“alti”) minarets. To this day, Muslims continue to

worship in the mosque.

3

6

7

12

14

8 Turkey’s solid economy has strengthened its position of power in the world. In its determined progression from emerging to

developed status, will Turkish leaders join economic forces with Europe…or Asia?

Investors’ Armor Our guest writer, Terry Savage, on how to win the war against savers.

Fast Tracking China Expediting an urban plan to address air pollution.

Shifting Supplies of CopperA landslide in Utah illustrates an unexpected move in a commodity.

Minute with the ManagerBrian Hicks reflects on 10 years of the commodity supercycle.

Volume 2, 2013 • www.usfunds.com 3

LETTER FROM THE CEO

Dear Shareholder, A key element of our investment process is tracking and monitoring government policies as we believe they are precursors to changes in the marketplace.

A great example is the Federal Reserve’s mandate over the past several years to hold short-term interest rates low. These days, 90-day Treasury bills are yielding around 0.06 percent, or a half of a basis point, each month.

Meanwhile, dividend payouts have been rising and companies have been buying back their stock in record numbers, resulting in attractive total shareholder yields. After our team identified this development, we shifted our focus to holding companies that offered this value to their investors. Our funds were rewarded for this adaptation.

Implications for fixed-income investors are significant. I asked my friend, Terry Savage, to be our special guest columnist for this issue, as she is very eloquent on this topic. On page 6, she shares her thoughts, saying, “Savers are the big losers in this rigged game. And most domestic savers are seniors and those approaching retirement, who planned to live on the income generated by their savings.”

To call the individual investor a “big loser” may be an understatement. For the first time in history, many of the world’s central banks, which guard $11 trillion in foreign-exchange reserves, are reaching for yield and starting to add equities. This is an unprecedented move. According to a survey done by Central Banking Publications, among 60 central bankers, almost half see the need to add risk to their portfolio, and “23 percent said they own shares or plan to buy them” within the next five years, says Bloomberg News.

Bank of Japan says that its investments in equities will “more than double” by 2014. In addition, the Bank of Korea started buying Chinese companies in 2012, “increasing its equity investments to about $18.6 billion, or 5.7 percent of the total,” reports Bloomberg.

This previously mentioned trend of companies focusing on their return on capital with stock buybacks and dividend payouts has positively affected stock market returns. You can see in the first chart on the next page that from 2009 through 2012, companies in the S&P 500 have been buying back more stock and paying out more in dividends. This has led to a fantastic increase of more than 70 percent cumulative return in U.S. stocks over that time frame.

Why it’s important for investors to

adapt to new market trends

and cycles

Frank Holmes, CEO and Chief Investment Officer

How the Formation of Capital Model

is CHANGING

continued •


This same increase in buybacks and dividends occurred in 2004 through 2007, with the same result in market rise. In 2007, the S&P 500 hit an intraday record high of 1,576.

I believe this shift in managements’ focus is because compensation incentives have changed. In the 1990s, companies granted stock options, which gave an employee the right to buy the company’s shares sometime in the future at a set price. If the stock rises above that price, the employee profits. If the price falls, the options are worthless.

In a volatile market, these stock options encouraged employees to sell their shares once the stock hit that price. But over the past decade, restricted stock options have grown in popularity. Restricted stock usually comes with a vesting requirement, but

once vested, the shares are owned by the employee. Even if the stock price falls, the shares are still worth something.

It’s now in the best interest for management to buy back stock because it means employees’ relative positions increase over the vesting period.

I believe that compensation influences how executives and their companies make decisions. This current switch to restricted stock grants is positive, as they now align their decisions with their shareholders.

The shrinking number of shares outstanding in the S&P 500 shows another way the capital formation model is changing. Take a look at the third chart, which shows that the current equity in the market has fallen to an extreme low. Meanwhile, the S&P 500 is climbing to all-time highs.

2001

1.25%

1.37%

2002

1.58%

1.81%

2003

1.23%

1.61%

2004

1.78%

1.57%

2005

3.11%

1.79%

2006

3.39%

1.77%

2007

4.58%

1.92%

2008

4.33%

3.15%

2009

1.39%

1.97%

2010

2.61%

1.80%

2011

3.54%

2.10%

2012

3.09%

2.19%

BuybacksDividends

Dividends and Buybacks on S&P 500 StocksPercent of Year-End Closing Index Level

Percentage of CEOs from S&P 500 Companies Receiving Equity-Based Compensation

100%

80%

60%

40%

20%

0%1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

CEOs with Option GrantsCEOs with Restricted Stock Grants

Sources: Musing on Markets; Murphy, Kevin J., “Executive Compensation: Where We Are, and How We Got There,” Handbook of the Economics of Finance, Forthcoming.

www.usfunds.comDo you have a busy summer

schedule? Keep in touch! Provide us with your email address and you’ll receive a note every time

Frank updates his blog.

•

Three Ways Capital Formation is Evolving


Back in March 2008, the market was seeing an opposite situation. After the height of the financial real estate boom, companies in the S&P began issuing more and more shares, which expanded the equity in the market, and the stock market plunged.

In 2012, companies within the S&P 500 bought back nearly $400 billion of their own stock, and with companies continuing to hold record levels of cash, buybacks will likely continue. This bodes well for U.S. stocks.

Because these trends have large implications for your portfolio, I urge you to make sure your investments are poised to participate. Several of U.S. Global’s funds offer access to companies with attractive shareholder yields. For example, half of the All American Equity Fund (GBTFX) is dedicated to our shareholder yield model, with the holdings paying an average dividend yield of 1.85 percent.

And for the emerging markets portion of your portfolio, we offer the China Region Fund (USCOX), the Emerging Europe Fund (EUROX) and the Global Emerging Markets Fund (GEMFX). The dividend-paying stocks in USCOX and EUROX have an average yield of 2.19 percent and 4.16 percent, respectively, while the companies in GEMFX pay a dividend yield averaging 5.25 percent.

Go to www.usfunds.com or call our shareholder services team at 1-800-873-8637 to learn more about how you can incorporate them into your diversified portfolio.

Sincerely,

Frank Holmes CEO and Chief Investment Officer U.S. Global Investors, Inc.

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. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Net Shrinkage of Equity vs. S&P 500 Index1600

1400

1200

1000

800

600

400

200

0Mar-80 Mar-84 Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12

600

400

200

0

-200

-400

-600

Source: Bhirud Associates, Inc.

S&P 500 Index (left axis)Net Shrinkage of Equity, in Billions (right axis)

StockBuyback

Tech TopFinancial

Real Estate TopFinancialBailout Expansion

Shrinkage

Three Ways Capital Formation is Evolving

“I don’t know what the seven wonders of the world are, but I know the eighth, compound interest.”

— Baron Rothschild

Dividends have historically contributed significantly to investors’ returns. From 1926 to the end of 2012, dividends made up 1/3 of the S&P 500 Index returns.

And reinvested dividends can add up! Over the past 10 years through 2012, the price return of the S&P 500 was nearly 115 percent. If one reinvested the dividends, the total return rose to just over 200 percent.

Don’t forget about emerging markets, which are currently yielding more than U.S. stocks. While the S&P 500 Index pays a dividend yield of 2.05 percent, the stocks in the MSCI Emerging Markets Index are yielding 2.65 percent.

Source: S&P Dow Jones Indices and Bloomberg


GUEST COLUMNIST

The real reason the Fed needs to keep interest rates low is to help disguise the bill for interest on the ever-growing national debt. In 2012, it’s estimated that the United States spent about $220 billion paying interest on our $16.7 trillion dollar national debt.

In fact, interest on the national debt is the third largest category of government spending — after Defense and social programs such as Medicare and Medicaid.

With 90-day T-bills currently yielding 0.06 percent, and 2-year

Treasuries paying 0.23 percent, and 10-year government IOUs around 2 percent, you can see how a slight increase in rates could quickly send the interest bill soaring.

Those interest payments go to holders of debt ranging from grandma buying Treasury bills, to money funds, to foreigners who — according to the Treasury department — include China with $1.2 trillion of Treasury securities, and Japan with $1.1 trillion.

Even at today’s low interest rates, they view U.S. Treasury securities as the safest and best place to park their reserves. You can’t

“sequester” interest payments to those who buy our debt.

And that’s a good thing. Because if these investors grow wary of the future value of their wealth invested in dollars, the first thing they would do is demand higher interest rates to offset those fears. Few other alternatives, including gold and other foreign currencies could serve as a repository for this global wealth.

The United States government is the biggest beneficiary of low interest rates, because it is the largest borrower. But turning to the other side of the coin, who is the biggest loser when the Fed keeps rates artificially low by purchasing $85 billion of securities with newly-created credit every month?

Taking Care of Mom

Savers are the big losers in this rigged game. And most domestic savers are seniors and those approaching retirement, who planned to live on the income generated by their savings. Today, that’s simply not possible — unless they are willing to take on a lot more risk.

Seniors are told that interest rates are low because inflation is low. And, indeed, the Bureau of Labor Statistics’ Consumer Price Index says that inflation is currently running at only 1.5 percent annually, as of March 2013.

But if you put your money in the bank in a one-year CD, you’ll earn only about 0.25 percent, according to Bankrate.com. That’s the national average, and while you can search out higher rates, few FDIC-insured CDs come close to matching inflation. The average 5-year CD rate is only 0.79 percent.

Even before taxes, this safe, “chicken money” is a loser for seniors. And then there’s the question of whether the measures of inflation actually reflect the kind of price pressures that seniors find themselves paying.

Most seniors aren’t interested in, or can’t afford, the latest smart phones — which reflect the lowered cost of technology. But they find themselves paying more for uncovered medical expenses including custodial care — costs that are rising far faster than 1.5 percent annually. Similarly, property taxes and state fees for everything from drivers’ licenses to picnic permits, are rising faster than reported inflation as states try to improve their budget crunch.

Seniors on fixed incomes who planned to supplement their retirement needs by using interest on their savings are now forced to dip into principal. Or else, they must find riskier, higher-yielding investments. Or, as a last resort, they may turn to you, their children for support.

Don’t Fight the Fed

There’s an old Wall Street saying: Don’t fight the Fed. It’s a recognition that the all-powerful central bank has ultimate control over the global $16+ trillion marketplace for U.S. Treasury securities. After all, they can “print” the money — which is exactly what they’ve been doing for the past 5 years.

All that money creation has kept interest rates low in recent years. And it looks like the Fed will continue that credit-creation trend as economic growth continues to disappoint.

Yes, it’s possible that restored economic growth will push rates higher in the future. And it’s also possible that somewhere down the line the global markets will take a look at all that money creation and demand higher rates to compensate for the dilution in value of the money — inflation.

In the meantime, seniors and other savers must be careful about taking more risks — either by purchasing riskier securities or by extending maturities to capture higher rates. Remember the mantra of the chicken money saver: “I’m not so concerned about the return on my money, as I am about the return of my money!” And that’s The Savage Truth.

THE WAR AGAINST SAVERS

Terry Savage, Nationally known expert on personal finance, the

economy and markets. Learn more at terrysavage.com.

All eyes will be on the Fed over the next several months, looking for changes in policy.


The Asian giant has been in the midst of constructing the world’s largest transportation system, laying mile after mile of high-speed rail and subway track. China may be emulating the Singaporean model, as the country experienced an incredible transformation from an emerging country to an economic force in the east. Among its many achievements, Singapore now boasts the highest GDP per capita in the world and ranks as the easiest place in the world to do business, says the World Bank.

China’s pragmatic urban planning is expected to help 1.3 billion residents move around the country efficiently and reduce increasing air pollution due to car emissions in big cities including Beijing.

Because of the government’s previous effort to encourage consumption and help its residents achieve a higher standard of living, new cars filled the roads as fast as they were paved. Over the past decade, sales accelerated from less than 5 million vehicles in 2002 to nearly 20 million in 2012. About 114 million automobiles are now registered to Chinese residents, with ownership exceeding 1 million across 17 Chinese cities.

The country is also the world’s largest energy consumer, with a huge dependence on fossil fuels, especially coal. You may think that the country’s use of coal would be the single largest factor driving air pollution, but, in Beijing, emissions from vehicles make up a bigger percentage. One-fifth of the fine particulate matter, which is made up of nitrates and sulfates, organic

chemicals, metals and dust particles, comes from automobile and truck emissions in the city, according to JP Morgan. Across the entire country, automobiles cough out 27 percent of total nitrogen oxide emissions.

With residents dealing with increasing cancer-causing pollutants and vehicle congestion on roads, public discontent is rising, “adding particular urgency to causes such as environmental protection and public sector reform,” says JP Morgan.

China’s government policies were already addressing air pollution, and this year, leaders appear ready to continue these environmental priorities. In comparison to last year’s budget, a larger portion of government spending will go toward environmental programs. While other areas will see a decrease in spending compared with last year, spending on environmental protection is projected to grow nearly 19 percent, says JP Morgan.

With a concrete plan and budget in place, it all comes down to execution and enforcement. It helps that newly elected President Xi Jinping holds the three most powerful titles in elite Chinese politics: the Secretary General of the Party, the Chairman of Military Commission and President of the Nation. This “triple-power strength” positions him as an ideal reformer for China. He may likely have little interference from former leaders, giving him a freer hand to tackle some of the growth challenges in China today, including reforms to improve environmental protection.

www.usfunds.comSee how world cities dealt with pollution in the past.

•

China is planning to add

800 miles to its subway system

over the next

two years. That’s the distance

equivalent from

Chicago to New York!

In 2015, when

the infrastructure

is complete,

China’s subway

track alone will be

a mind-boggling

1,900 miles.

CHINA’S

FAST TRACK

Beijing, China

8 Volume 2, 2013 • www.usfunds.comIstanbul, Turkey

Turkey?Istanbul has been in the midst of a fantastic transformation from an

impoverished population to one of affluence. Popping up among the beautiful Ottoman mosques, Byzantine churches, palaces and bazaars are ultra-contemporary art sculptures, shopping

malls and lush landscaping. This blend of ancient with modern fits well with the young, vibrant and culturally

diverse crowd that hangs out in the local cafes, shops and galleries.

ƒor

continued •

ANew Chapter


Earlier this year, German Chancellor Angela Merkel, the powerhouse figure of the European Union, went to Ankara to meet with President Abdullah Gul and Prime Minister Recep Tayyip Erdogan. The topic of their discussion is not new, but suggests a “new chapter” for Turkey. These leaders are picking up the conversation started years ago regarding Turkey entering the European Union (EU).

Tim Steinle, portfolio manager of the Emerging Europe Fund (EUROX), says that unlike Greece, which fudged its numbers to join the EU, Turkey was held to a higher standard. Its leaders dog-gedly pursued this aspiration, and in the process of implementing the EU accession chapters, including the Right of Establishment & Freedom to Provide Services, Company Law, Financial Services, Information Society & Media, Statistics, Financial Control, and Science & Research, had modernized its economy, making it competitive with those of Western Europe. In addition, open trade with the EU allowed it to build a diversified export economy.

Turkey’s admittance to the EU had been stalled, but France and Germany seem to be warming to the idea. Under newly elected President Francois Hollande, France is opening another chapter to the accession, and Angela Merkel’s visit to Turkey is signaling a shift in Berlin’s position on Turkey’s membership.

This wasn’t the only time Turkey reformed its policies. In 2001, the country experienced its own

devastating financial crisis, and as a result of that experience (with which the rest of the world can now sympathize), the government adopted tough, but important financial and fiscal reforms. These reforms helped the country rebound, and its strong banking regulations kept banks well capitalized compared to the financial institutions in the U.S. and Europe.

In the charts at right, you can see the result of the government’s determination. From 2010 through 2012, Turkey’s GDP exceeded that of Europe, the Middle East and Africa (EMEA), as well as the rest of the world. Through 2015, GDP is also expected to be greater than EMEA’s GDP as well as overall world GDP. Turkey’s economic growth “remains superior in the region,” says Wood & Co.

The country’s manufacturing sector, in areas such as the automotive industry, white goods that include refrigerators and washing machines, and glass makers, has also been growing in strength.

For nearly two years, Turkey’s purchasing managers’ index (PMI) has been significantly stronger than Europe’s and “outstrips global averages,” says Wood & Co. Although the PMIs around the world fell rapidly in mid-2011, Turkey’s manufacturing hasn’t fallen below the expansion number of 50 as often, and as significantly, as Europe. According to Wood, Turkey’s PMI also recovered, “signaling growth ahead.”

I nvestment managers such as U.S. Global Investors aren’t the only ones showing increased interest in Turkey’s new-found prosperity. One of Secretary of State John Kerry’s early trips as America’s top diplomat was to Turkey to encourage leaders to improve ties with

Israel and to help stop the violence in nearby Syria.


www.usfunds.comLearn more about the exciting countries of emerging Europe.

•

Manufacturing Output in Turkey Stronger Than EuropePurchasing Managers Index60

54

56

58

50

52

44Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

46

48

Source: Markit, Wood & Company

Turkey PMIGlobal PMIEurozone PMI

6

8

10Turkey Expected to Grow Faster than EMEA and World

2

4

02010 2011 2012 2013F 2014F 2015F

Source: Wood & Company

Global GDPEurope, Middle East and Africa GDPTurkish GDP

Turkey’s manufacturing PMI number of 53.5 in February was slightly lower than its January figure of 54.0, but manufacturing remains solid and in expansion territory. Businesses are reporting an increase in new orders, new products and new clients and “new business from abroad increased at the fastest pace since January 2012,” says HSBC.

With the country exhibiting positive demographics, strong consumer demand and an open, competitive economy, Turkey is at a figurative, as well as literal, crossroad between Europe and Asia. The European Energy commissioner Günther Oettinger annoyed

Germany when he suggested that the EU needed Turkey more than Turkey needed the EU:

“I would like to bet that one day in the next decade a German chancellor

and his or her counterpart in Paris will have to crawl to

Ankara on their knees to beg the Turks, ‘Friends,

come to us.’”

However, Spiegel Online reports Erdogan hinted that the emerging economy may consider joining the Shanghai Cooperation Organization, which includes countries such as China and Russia, instead. “The economic powers of the world are shifting from west to east, and Turkey is one of these growth economies,” remarked the prime minister.

While many economic and financial policy actions put Turkey on a positive course and helped create a wealthier domestic consumer, the transition from emerging to developed status isn’t always going to be smooth, as shown by the recent protests. It’s natural that residents demand to have a say in the political process and we are hopeful that leaders will work with the people toward democratic solutions.

Still, opportunities in Turkey remain. Shareholders can gain access to this area via the Emerging Europe Fund, as a significant percentage of its holdings are located in Turkey.

Istanbul, Turkey

12 Volume 2, 2013 • www.usfunds.comBingham Canyon Mine, Utah. Photo by Ravell Call for the Deseret News

LANDSLIDE

HOW IT SHIFTS COPPER SUPPLYThe U.S. copper mining industry was dealt a devastating blow this spring as Kennecott Utah Copper’s Bingham Canyon Mine experienced a pit wall failure causing a massive landslide with rocks and dirt covering the bottom of the mine pit. It’s a miracle no one was hurt thanks to the vigilance of its owner, Rio Tinto.

Brian Hicks, portfolio manager of the Global Resources Fund, is very familiar with the mine, having visited it often. He also has personal ties as both of his grandfathers were once employed by the mine. When Brian saw the photo of the landslide, he said the destruction of the collapsed wall and falling rock was apparent, yet the tremendous scale of the mine cannot be captured in pixels.

Bingham Canyon’s immense size is a powerful sight to witness. It is one of the largest open-pit copper mines in the world, it’s the second largest copper producer in the U.S., and it’s been in operation for more than one hundred years.

The mine supplies about 1 percent of copper to the global market and produced 163,000 tons in 2012, but over the next year, copper output should be lower because of the landslide.

This is a short-term setback for Rio Tinto, as the mine is one of four main copper assets for the company, but Nomura sees an additional shift in the copper market,

“where this could take a market where many observers felt a meaningful surplus was about to emerge, back to remaining quite tight” in 2013.

Copper production had been rising to a new high, moving from a deficit to a balanced market. This is a typical move for the metal, but “this is not to say that persistent growth of new mine supply is not problematic for a variety of technical and other reasons,” says Credit Suisse. In addition to the setback from Bingham Canyon, the new mines under development, including one in Mongolia, might not come on line as quickly as one thinks.

Copper mining has always been dealt more than its fair share of challenges: There have been labor disputes, such as the massive strike in Grasberg in Indonesia, which significantly reduced production from a pre-disruption level of about 500 to 700 tons to 136 tons in a year, says Credit Suisse. Political issues and weather catastrophes have also hurt copper supply in recent years.

The good news is that demand for copper persists, with a growing population and rising urbanization.

The red metal is the most widely consumed base metal, dominated by wire and cable and used in anything that is electrical or electronic. Credit Suisse estimates that about 20 percent of overall copper is made into building wire and construction uses make up almost 30 percent of the world’s copper use.

Another growing use of copper comes from hybrid and electric cars. Many countries, including China which uses 40 percent of the world’s copper, have been encouraging residents to purchase hybrid and electric cars via subsidies. These fuel-efficient cars consume substantially more copper than an automobile run on gasoline. Whereas a gasoline-fueled car uses 50 pounds of copper, an electric car can consume triple that amount, according to the Copper Development Association.

As we often say, there’s no free lunch on the commodities table: If more hybrids fill the roads, more copper will inevitably be needed.

The landslide in Utah is just one example of how quickly and unexpectedly the supply and demand factors facing the red metal can shift, which we believe underscores the need for nimble active management.



MINUTE WITH THE MANAGER

China has been a big driver of commodity demand. China has been integral to the resources market over the last decade as it has seen incredible growth. On average, over the past 10 years, China’s GDP rose 10 percent each year. Back in 2002, the U.S., the U.K., France, Germany and Japan were all economically larger than China. Now, the Asian giant is the second largest nation in the world behind the U.S.

Its residents have been big beneficiaries, with GDP per capita on a purchasing power parity basis tripling from less than $3,000 in 2002 to almost $10,000 today. On one single measure of this rising wealth, look at the automobile industry. A decade ago, only 5 million

cars were on the road. Today, 114 million vehicles are registered to Chinese residents. Across 17 cities in China, ownership exceeds 1 million automobiles.

Describe how China’s growth affected commodities.Mass amounts of materials, including aluminum, copper, iron ore and steel, were required for China to build out its massive infrastructure for its residents. China constructed thousands of miles of roads, subways and railways to help its residents travel. The country built multiple cities filled with skyscrapers and housing for its urbanizing citizens.

In terms of energy needs, China’s rapid growth increased its reliance on other countries for key

Brian Hicks has been the co-portfolio manager of the Global

Resources Fund (PSPFX) for just about 10 years. During his

tenure, Brian has seen an incredible demand for natural

resources due to trends such as rising urbanization, growing

wealth and infrastructure buildouts. We asked Brian to reflect on his decade of managing

the fund and talk about what he anticipates in the coming decade.

Shanghai, China


www.usfunds.comWhat’s used in feed, fuel and alcohol, knee high by the fourth of July and included in our definition of global resources? Find the answer online.

•resources. Crude oil, natural gas and coal all felt hyperbolic rises in demand as China turned from exporting its natural resources to importing its needs.

China became a net importer of crude oil in 1994, and today, is the second-largest oil importer in the world. To obtain more natural gas, China spent years building massive pipelines to transport the commodity from Russia and other western Asian countries. Coal, which accounts for the majority of total energy consumption, has also been imported since 2008, and since that time, imports rose substantially.

I hear China’s new president traveled to Russia and Africa lately. Why?Similar to the real estate saying, “It’s all about location, location, location,” in China, it’s about resources, resources, resources. President Xi Jinping’s first visit outside China after his inauguration was to four countries: three were in Africa. The fourth was Russia. These visits say a lot about the new leader’s priorities. The leaders know that their 1.3 million residents will continue to pursue a higher standard of living, will move to the cities and as a result, will consume more energy. These higher consumption levels need to be met, and we believe it is China’s intention to build relations with these countries to meet those needs.

It’s not only China using commodities.Correct. The other countries in the BRIC acronym — Brazil, Russia and India — have experienced huge

growth over the past decade, as well as multiple other emerging market countries that have been experi-encing rising population and urbanization trends along with growing GDP per capita and government policies that support this growth.

What do you expect for commodities over the next 10 years?The drivers of commodities remain, even if China’s GDP slows to 7 to 8 percent. There are several emerging markets that are growing faster than developed countries. Urbanization trends continue and population is growing. We believe these factors will fuel the demand for a wide range of resources, including agriculture, food, forest and lumber, oil and gas and base metals.

Unlike other commodity-based funds, co-portfolio manager, Evan Smith, and I take a balanced approach to global resources. We invest in companies across 10 different industries. The reasoning is simple: Commodities and commodity stocks have wide price fluctuations that are seasonal and cyclical, and we believe a diversified basket of commodities helps reduce volatility and improve returns.

In addition, our years of researching, buying and selling companies that are involved in exploring, producing and processing commodities helps us see past short-term negativity to long-term opportunity.

GET TO KNOW

Brian Hicks, CFA Portfolio Manager

Tenure at U.S. Global Investors: Nearly 10 years

Education: Master’s of science in finance and a bachelor’s of science in business administration from the University of Colorado; CFA charterholder

Professional Specialties: Oil & Gas — Exploration & Production, Metals & Mining, Equity & Index Options, Quantitative Analysis/Statistics.

Favorite subjects in school: Economics, Statistics, History

Quote to live by: “In the beginner’s mind there are many possibilities. In the expert’s mind there are few.” Shunryu Suzuki

Books you’re reading right now: Atlas Shrugged by Ayn Rand and The Intelligent Investor by Benjamin Graham

Favorite sport: Football and Basketball

Last countries to stamp your passport? China to speak at a mining conference and Canada to attend a natural resources conference

Shareholder Report U.S. Global Investors P.O. Box 659405 San Antonio, TX 78265-9604

Presorted Standard

U.S. Postage PAID

U.S. Global Investors

MAPPING IT

WANT TO GET AWAY FOR THE WEEKEND?Here’s how much two nights in a 5-star hotel room with meals, car rental and a bit of shopping will cost you in di�erent cities around the world. Sydney hits your wallet the most, while a weekend in Mumbai is a fraction of the price.

New York City

$1,243

São Paulo

$1,750Cape Town

$909Sydney

$2,402

Moscow

$1,680

Mumbai

$547Beijing

$1,023

Note: A weekend holiday in a city is defined as follows: two nights at a standard 5-star hotel room, four meals, two snacks, car rentals for two days, two pints of beer, four liters of soft drinks/water, and a bit of shopping (purchase a pair of jeans and a pair of sport shoes). Airfare not included. Source: Deutsche Bank AG/Hong Kong

Kuala Lumpur

$575

Paris

$1,583

2013 vol. 2 next chapter - u.s. global investors€¦ · these days, 90-day treasury bills are...

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