Commentary from Charlemagne Capital
Charlemagne Capital is subadvisor to the U.S. Global Investors Eastern European Fund (EUROX), which invests in Russia and other Eastern European countries. This commentary was adapted from a research update issued this week.

The recent sharp share price fall suffered by Mechel, among other stocks and other developments, may put the Russian stock market in a poor light. Similar events have happened before, however, and all have proved to be excellent buying opportunities. We continue to see long-term value in an economy that is clearly going places and one that it would be foolish to ignore.

Mechel is a vertically integrated metals and mining group with substantial coal interests and steel-making capacity. On July 24, its share price fell some 40 percent in the wake of criticism, aired live on TV, of both its chief executive and its pricing policies by Vladimir Putin, the prime minister. On the same day, the British chief executive of TNK-BP, the joint venture oil and gas concern between BP and a Russian group, fled the country citing intolerable harassment. Taking these two occurrences together (and there are others that also could be added to the list) suggests to some a business system controlled from the center where the rule of law and the principles of a market-based economy may be subservient to personal fiefdoms.

Such a view is most probably an overreaction. The fall in the Mechel share price itself, although owing something to concerns that Putin was getting ready to bring it down just as he had earlier brought down Yukos, occurred in a nervous market with all commodity stocks under downward pressure thanks to falling prices. Other similar companies also experienced large falls in their share prices, including the coal miners Belon and Raspadskaya, as well as the steel company Novolipetsk. The issues aired by Putin were well known, and Mechel had already responded to the pricing issue by entering into long-term contracts; it knows where it stands and is prepared to toe the line with the government (unlike Yukos). We met the management of the company within the last month and were sufficiently impressed by its growth prospects to increase our exposure to the company (though without going significantly overweight).

The TNK-BP situation is also not new; friction between the joint venture partners had been obvious for some time, and an eventual split has become a foregone conclusion.

Therefore, stock market movements seem not to reflect any new company-specific developments and may instead owe more to a gut reaction based upon a lack of understanding of the true situation on the ground, against a backdrop of nervous investors and falling share prices worldwide.

The distinctive Russian style of doing business may irk many people, but it should not be allowed to detract from the opportunities that exist across a vibrant economy that has seen a remarkable transformation over recent years and one that still remains essentially underdeveloped in many areas. Although sentiment and emotions will drive the market over the short term, we remain optimistic over the longer term.

Please consider carefully the 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. 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. Holdings in the Eastern European Fund as a percentage of net assets as of June 30, 2008: Mechel (0.54%), BP (0.00%), Belon (0.00%), Raspadskaya (0.00%), Novolipetsk (0.36%).