Surfing the Internet in his home office one day more than a decade ago, Sheldon Meingarten came across an unusual investment fund.
It had been a tough time for investors to make money: The bursting of the tech bubble, 9/11 and a moderate recession in the U.S. had conspired to send stock markets on a downward spiral. But one portfolio manager, Eric Sprott, seemed like a wizard, generating annual returns of roughly 30 per cent since 1997.
Mr. Meingarten invested a chunk of his wife’s RRSP into the Sprott Canadian Equity Fund. Soon after, he added his own money, spreading the investments across several funds. In all, he put in a “healthy six figures.”
For years he felt like a genius. At one point his return on the investment had climbed to about 250 per cent, so he didn’t pay much attention to Mr. Sprott’s world view that hard assets such as gold and silver would thrive in a world awash in debt, and that producers of these precious metals would soar when the financial system collapsed. “I was riding that rocket,” Mr. Meingarten said.
The rocket has now crashed. Falling prices for commodities and resource stocks have badly hurt the performance of Sprott Asset Management, and Mr. Sprott has lost more than a little of his reputation as the man with the Midas touch. Investors in that Canadian fund have lost nearly half their money over the past five years, but the returns have been just as bad on many Sprott funds. Through March, three of the firm’s hedge funds had lost at least 33 per cent of their value in the preceding 12 months – and that was before last week’s sharp decline in gold and silver prices.
Investors have pulled their money in response; the firm’s mutual, offshore and hedge funds suffered redemptions totalling $539-million last year.
Money managers earn fees as a percentage of the value of their assets under management, so less money to be managed means less revenue earned. That pessimism has seeped into the stock price of the public company that owns the asset management business, Sprott Inc. Since going public in 2008 at $10 a share, the asset manager has only once traded at that value again. It closed on Friday at $2.73, a loss of 73 per cent since its debut.
All this red ink raises some critical questions. How long will Mr. Sprott remain wedded to the theories that tie him to junior resource plays? And how long will his colleagues stand behind them?
The Globe and Mail spent the past few weeks talking to the company’s senior management, including Mr. Sprott himself, power players in Bay Street’s asset management circles, analysts and former Sprott employees. Many of those interviewed believe the company will struggle until Mr. Sprott, who is 68, retires, but a vocal minority believe the asset manager can turn things around by diversifying into the income and yield-oriented securities that investors now crave, even if the founder lingers.
An attempt to diversify
Eric Sprott’s prestigious art collection – a Van Gogh, a Monet – still hang on the walls of Sprott Inc.’s offices in Toronto’s Royal Bank Plaza, but the man himself is often abroad.
Since stepping back from day-to-day management of the company and handing the reins in 2010 to Peter Grosskopf, a former Cormark Securities executive, he now spends about one-quarter of his time in Scottsdale, Ariz., where he bought a house for $7.2-million (U.S.) in 2008.
However, he still vigorously manages several flagship funds, and remains the firm’s public face. When gold markets plummeted last week – the most in 30 years – it wasn’t Mr. Grosskopf who spoke on a conference call the next day. Mr. Sprott took the microphone and made sure everyone knew his company was still committed to precious metals.
Multiple people who’ve left Sprott Inc. told the Globe that Mr. Sprott’s unwavering belief in investing in gold and silver led the founder to butt heads with those inside the firm who questioned this stance. These sources claim that if staff argued for diversifying the funds in the past, Mr. Sprott had sometimes accused them of not being team players.