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Hedge fund manager Eric Sprott. (Darren Calabrese For The Globe and Mail)
Hedge fund manager Eric Sprott. (Darren Calabrese For The Globe and Mail)

Eric Sprott: Can the gold hawk find magic after the commodities crash? Add to ...

That’s a misconception, the current managers say. “I think people still are fearful that Eric will disapprove if they take a contrary view,” Mr. Grosskopf said. Yes, Eric Sprott can “roar,” the CEO said, “but he’s also incredibly supportive of people that are successful running franchises for their own clients and for their own strategies.”

“You will get people who come from this firm who say, ‘Oh, Eric didn’t approve of what I was doing,’ but those were people that generally weren’t strong enough to survive in their own businesses.”

Mr. Grosskopf uses his own story as an example of what can be accomplished. “When I first got to the firm, we had the opportunity to take all our resources and put them in that precious metals area, and just become the world’s biggest precious metals firm … And we said, ‘We shouldn’t do that.’”

To branch out, he hired Scott Colbourne, a fixed-income manager from TD Asset Management, and later brought on John Wilson to focus on equities across all industries. They were named co-chief investment officers in 2012.

He’s also pursued adding a global macro fund as well as a partnership with Chinese gold and copper giant Zijin Mining Group Co. Ltd., which put up $100-million to start a new fund with Sprott’s managers, who contributed $10-million.

Outside the fund business, Mr. Grosskopf is beefing up several business lines, including Sprott Resource Lending Corp., which lends to resource companies, and a private equity arm that invests in smaller explorers that aren’t publicly traded. Both generated the bulk of Sprott’s special performance fees in 2012.

Yet Mr. Grosskopf continues to double down on resources, too. In 2011, the company paid $90-million in stock to acquire three U.S. investment funds run by Rick Rule – who, like Mr. Sprott, is a gold bug. And he has emphasized selling Sprott’s physical gold and silver trusts, which offer investors the ability to directly own the precious metals. Since 2010, these trusts have raised a hefty $3.4-billion.

These funds have brought in new assets at a time when Sprott’s mutual funds and hedge funds face contraction . During the bull market in commodities, stellar returns kept the money pouring in, but those days are gone. Despite its push into fixed-income, the company has raised only $500-million in this asset class, amounting to about 5 per cent of Sprott’s $10-billion in assets under management.

Unwavering belief

Despite the troubles, Mr. Sprott will not be shaken from his belief that precious metals are one of the few ways for investors to protect themselves from an inevitable spike in global inflation, caused by central bank policies that increase the money supply in an effort to create growth.

Even in the face of tepid inflation, a resurgent U.S. stock market and the prospect that the U.S. Federal Reserve will curtail its quantitative easing program, Mr. Sprott can still find evidence to back up his investment thesis. For example, he points to the Japanese central bank’s recent decision to ramp up its own money-creation efforts in order to stimulate its economy and to devalue the yen.

“People who realize the insanity of the financial policies should get involved in the safe assets, and that safe asset should not be a paper asset,” he said in an interview.

He’s not alone in that view. “Certainly governments are still overspending; debt levels are high; the amount of printing that’s going on globally is astounding,” said Chris Beer, senior portfolio manager of commodities and precious metals at RBC Global Asset Management. In the past few years “we had a tiny increase in the gold supply, but we’ve had a monumental increase in the monetary supply.”

One of the riddles of Sprott’s performance is that many of the things its founder predicted did come to pass – an abundance of debt led to the collapse of a major Wall Street institution (Lehman Brothers) and five euro zone countries were bailed out – yet the funds have still struggled. “It’s like you’ve got all the answers right, and the teacher gives you a C+,” a former employee said.

There is also an unanswered question in Mr. Sprott’s theory. Hard assets have value because there is a fixed supply of them, but it isn’t clear why Sprott favours junior resource companies as the best way to play that market. These companies typically explore for metals, and developing any of their projects would require either bank lending or raising money in the capital markets. Financing has been a struggle for juniors in recent months, and rampant delays and rising costs haven’t improved matters.

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