 |
| Frank Holmes |
“In the mutual fund industry you are butt naked every day,” says Frank Holmes. That might explain why Holmes, a Canadian, has flown south to enjoy the sub-tropical climate of San Antonio, Texas. But the chairman of US Global Investors is, of course, talking metaphorically. He and his team are exposed not to the elements but to fierce competition, not least from larger fund managers with worldwide brands. San Antonio-based US Global Investors manages 13 no-load mutual funds. It has $1.8 billion under management. “Some of our competition, like hedge funds, have far fewer regulatory issues to deal with, so we have to be innovative to compete,” says Holmes, who bought a controlling interest in US Global in 1989. “We have to be much more intellectually athletic.”
First fund
US Global was set up in 1968 to manage a growth fund that became the Gold Shares Fund, the US’s first no-load precious metals fund. In 1994, it launched the first no-load fund focused on Chinese companies. At the end of February, it was due to launch its new Global Emerging Markets Fund, in partnership with London-based investment managers Charlemagne Capital. Charlemagne Capital will look after the day-to-day investing of the fund, while US Global handles relations with US investors.
The two firms already work together on US Global’s Eastern European Fund, which returned 52.4% in 2004. According to investment researchers Morningstar, it was one of three US Global funds that took the podium positions in total-return rankings for equity funds for the three-year period to December 31 2004. Completing US Global’s clean sweep were its World Precious Minerals Fund and its Global Resources Fund. Global Resources Fund is Lipper’s top-ranked natural resources fund for the past one, two and three years. US Global appears to be doing something right.
Holmes says that this partly results from its use of mathematical modelling. He quotes legendary American football coach Vince Lombardi’s view that “you can’t have a perfect game, but you can have a perfect practice. So focus on what you control.”
One day of every US Global analyst’s week is spent looking at macroeconomic models. “The building block of alpha investing is how we use models to drive decisions,” says Holmes. “Investing is both an art and a science and the science requires skill in using mathematical principles. That’s Monday.”
So for an analyst, a typical Monday might involve looking at the overlap between China’s construction cycle and the US’s four-year presidential cycle. “All IQ tests are based on pattern recognition,” he says. “We try to have models that look for patterns and anomalies, then we ask why they are there and where we are in that pattern.”
Holmes’s own specialization is in natural resources, including gold and other precious metals. “The Kuznets cycle [posited by Nobel laureate Simon Kuznets] is the most important for commodities. We might take 30 years of energy data, try and overlap that with gold seasonality, and then look at where different emerging markets are in the Kuznets cycle.”
US Global advocates holding between 5% and 10% in gold stocks and rebalancing every year. “If you’d rebalanced every year in the 1990s you’d have been forced to take your profits and wouldn’t have got stung,” Holmes says. “It’s quite a conservative strategy, but you catch every major swing.” It also provides returns that can’t be modelled mathematically. “Gold stocks perform well when the stock market doesn’t,” says Holmes. “That makes you feel really good.”
Gold also has value because it is negatively correlated with the dollar. “When the US had the lowest rates in the world, people borrowed in the US to buy rand stocks, which is bad for the gold markets. So we traded out,” he says.
Sense of history
As well as Kuznets, Holmes peppers his conversation with references to Porter’s Five Forces Model, SWOT (Strengths/ Opportunities/Weaknesses/Threats) modelling, and Analytical Hierarchy Processing models. Holmes says the Monday sessions give younger analysts a sense of history. The US presidential cycle can be tracked back for 200 years, for example. For the rest of the week, the focus is on what stocks to own. “The essence of forecasting is to concentrate on inter-market dynamics and relationships between countries’ GDPs, currencies, interest rates, commodities, bonds, earnings, and equities and different stages in the economic cycle,” says Holmes.
There’s more to commodities than cycles. Some banks argue that the current high commodity prices, and the returns they are bringing to investors, will last longer than in the past because they reflect structural changes in the market. Holmes agrees.
“The big structural change we’ve been talking about for a while is regulatory rule making,” he says. “In energy, for example, the supply side is now restricted by government policy. Clean air and clean water can’t be bought at Wal-Mart prices.”
Having run four marathons in 12 months, Holmes was planning to celebrate his 50th birthday in February by running the New Orleans marathon. His aim is to run two in consecutive weeks. “I found out that only 1% of people run marathons, and I like to be in the top 1%,” he says. “Then I found out that only 1% of marathon runners have run back-to-back marathons. That’s the goal this year.”
