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For Eric Sprott, being contrary still means success

Fabrice Taylor, Chartered Financial Analyst, is a principal in Capital Ideas Research and writes the blog

When it comes to stock market intrigue, few stories can compete with Timminco , which is now in its final throes.

Worth more than $3.5-billion not that long ago, the company is worth $100-million today. Fairly soon, as tends to happen with such woeful calamities, it will probably be worth substantially less.

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Among the victims is Eric Sprott, the legendary investor whose firm once owned almost a fifth of Timminco and still owns a lot. It isn't the only setback Mr. Sprott has suffered lately. He's lost assets under management, and shares of his firm, Sprott Inc., which went public two years ago for $10 each, are now worth less than half that. Some of his more assertive macroeconomic views have proven too pessimistic and fund performances reflect that mistake. Analysts aren't exactly excited about the outlook either. Hence the inevitable question: Does Sprott still have it?

"We still believe in ourselves," he told me yesterday when I put the question to him. While acknowledging that his primary thesis - the financial system is broken and a great bear market is upon us - hasn't been borne out yet, he stands by it. "I'm not convinced that we're wrong. We're at odds with the market but we have been many times before."

He has certainly been "wrong" before, if wrong means early. He shorted the housing market in 2006 only to watch it climb 60 per cent. He and his investors were eventually rewarded for that bet.

But, as they say in the stock market, history is not always a great predictor. The flagship Canadian Equity Fund, which accounts for almost a third of Sprott's assets under management and which has a long history of trouncing the market, has not kept pace lately, according to M Partners, a securities dealer. In fact, on average, the entire fund lineup was about 1 per cent below benchmarks at last count.

Assets under management actually fell in 2009, despite a huge market rally for three quarters of the year. A lot of the drop had to do with the departure of Jean-François Tardif, who ran an offshore fund. (He also sold his Timminco position around the same time he touted the stock on BNN, which didn't endear his or the Sprott name to many, although it did make investors in Mr. Tardif's fund a lot of money.)

But still, given Mr. Sprott's amazing record of attracting money, a shrinking asset base is a surprise, especially considering he has beefed up his staff and surrounded himself with some of the best people in the business.

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The crew as a whole is outstanding at picking winning stocks. Mr. Sprott didn't have the figures at his finger tips but he reckons the long bets have gone up about 100 per cent or so in the past year - "absolutely spectacular notwithstanding Timminco," which he rode up and back down because he believed in the technology. He is now in the process of liquidating that stake.

Still, investors and advisers don't seem wowed.

Sprott is now venturing into new arenas such as fixed income and flow-through offerings, areas Mr. Sprott concedes have not historically interested him much. That might stem the outflow of assets under management and in fact reverse the trend. There's also a new gold bullion fund with potential to grow, although it's not a big fee generator.

But the name on the door is still Sprott, and the guy the name belongs to is no yearling. So: Does he still have it?

It's not a question he answers directly but it comes out between the lines. Mr. Sprott doesn't like talking about his firm or administrative matters. He likes to talk about the perils of quantitative easing. He wants to discuss the repercussions of transferring private debt to the public balance sheet and the obvious damage that will do. He wants to talk about the fact that gold refiners can't find any recycled metal, which bodes well for bullion prices. He wants to talk about Sensio, one of the stocks he thinks has a good shot of winning out in the 3-D television sweepstakes.

It's clear as you listen to him, and read the market commentaries he publishes on the company website, that there's nothing Mr. Sprott likes more than to roll up his sleeves, research and make bold bets based on what he discovers. It's a system that has worked very well as evidenced by the flagship fund's outstanding long-term track record.

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And he also wants you to know he's been at odds with the market before and eventually won. That is uncontestable, and the truth is that Mr. Sprott has an uncanny ability of being wrong - or early - without it costing his investors much. If history is a guide - and how big that "if" is depends in large part on how different you think today's Sprott is from yesterday's - the funds and the stock will in time stand out again.

Meanwhile, Mr. Sprott sticks to what he likes most: "We're in the business of stealing investing opportunities from people who haven't cottoned on to what's happening."

In other words, being too early is better than being too late.

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About the Author
Investment Columnist

Fabrice Taylor, CFA, publishes the President’s Club investment letter, for which he and The Globe and Mail have a distribution agreement. More

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