Hedge fund manager Eric Sprott made a name and a fortune for himself with a prescient bet on gold and silver. But Sprott Inc. , the publicly traded asset manager he founded, is finding that creating a successful fund company requires more than a single big idea.
Investors want more than just the extremely volatile, precious-metals-focused funds that Mr. Sprott runs, and Sprott Inc. is missing out on the wave of cash flowing into balanced and income funds seeking steadier returns. So over the coming weeks, Sprott Inc. is set to roll out new mutual and hedge funds that invest in core Canadian stocks and in a balanced portfolio.
The firm hired John Wilson, former chief investment officer of a mid-sized Toronto asset manager, to run some of the new funds, and expects more hires will follow.
The conundrum for Sprott Inc. is how to broaden its appeal without repudiating the theories that Mr. Sprott espouses – chiefly that the financial system is, as he puts it, "a farce," and that gold and silver will be the safest place when it all comes crashing down. There's a lot at stake, chiefly meeting the challenge of making money for both investors in Sprott Inc. funds and Sprott Inc.'s stock, which have both struggled lately.
Mr. Sprott's strategy has worked in the long run. The Sprott Canadian Equity mutual fund and Sprott Hedge fund, both of which feature him as a lead manager, have returned 14 per cent a year for the past 10 years as precious metals prices have risen. But his current narrow focus on gold and silver made it a painful ride for investors in 2008 and again last year. Sprott Canadian Equity fell almost 30 per cent in 2011. Sprott Hedge fund fell 24 per cent.
With that performance from its flagship funds, Sprott Inc.'s stock is down 36 per cent from its 2011 peak, and well below its initial public offering price. Analysts don't expect Sprott Inc. shares to get back to those highs any time soon. A big reason is that the rough performance in the funds cuts into management fees earned by Sprott Inc., which are now expected to be depressed this year. That's reflected in a steep cut in analysts' estimates for 2012 earnings in recent weeks.
The hope is that by hiring new portfolio managers who share Mr. Sprott's suspicion of the financial system's health, but who invest in different ways that minimize volatility, the firm can attract more money – and make more, too.
Mr. Wilson "is a manager that is generally aligned with our macroeconomic thinking but who can steer clients through that in a different way than Eric, and it just happens to be in the most popular asset class because people are scared of the volatility," said Sprott Inc. chief executive officer Peter Grosskopf. "But [finding such a manager]was kind of like threading a needle."
Mr. Wilson plans to buy stocks of large companies you have heard of, as opposed to the small miners Mr. Sprott likes to lay bets on.
Mr. Wilson also plans to hedge those purchases by using options such as puts to protect against declines, and currency hedges on foreign holdings. All of that, combined with a focus on buying stocks that are cheap from a value perspective, is designed to lead to lower volatility.
"Eric has this fabulous demonstrated ability to take a long-term view and just create tremendous wealth, but he's willing to take a long-term view and take volatile ups and downs to get there," Mr. Wilson said in an interview at Sprott Inc.'s offices. "That is not for everybody."
"Even believing those same things, that the world is going to respond to its imbalances today by printing money, and I do believe that, I can invest in more traditional equity portfolios," Mr. Wilson said.
In addition to the funds that Mr. Wilson will run, Mr. Grosskopf said Sprott Inc. will look to offer an income fund. That will entail hiring another manager.
The greater plan is to not simply draw more money from retail investors. The company wants to bring in money from larger institutional investors, and is looking at launching a global macro hedge fund aimed at such clients.
So far, institutional money is only about $500-million, a fraction of Sprott Inc.'s total $10-billion of assets under management.
"When you look at the alternative asset world, you need scale to be successful," Mr. Grosskopf said. "If you want to take any kind of institutional client base on, they want to see a team, they want to see a system, they want to see compliance. And to have that kind of a team, you need scale. To have scale you can't just be a gold fund, you have to have other products."