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Sprott aims to boost conventional funds in its lineup

Sprott CEO Peter Grosskopf

Fred Lum/Fred Lum/The Globe and Mail

Sprott Inc , which has built its brand on investing in small-company resource stocks and gold bullion, is looking to add more conventional funds to its lineup.

The request for conservative funds like broad-based Canadian equity offerings without a big resource or value bent has become a "thundering herd type of question," Sprott chief executive officer Peter Grosskopf acknowledged Thursday after the firm reported a slightly higher third-quarter profit.

"We see some opportunities now to fill those product line opportunities" either through acquisitions as some smaller firms have struggled amid the market volatility, or hiring portfolio managers displaced from company mergers in the last two years, he told analysts during a conference call.

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GMP Securities analyst Stephen Boland said he likes Sprott's move to diversify its mutual fund offerings, but warned that the firm will be up against some tough competition. "It also puts Sprott in more direct competition with the larger mutual fund companies in the industry, which also compete on brand, service, fees and performance," he wrote in a note to clients.

Mr. Boland reduced his 2011 performance fee estimate to $30-million from $60-million as a number of the Sprott funds are below their benchmarks. But he cautions investors not to focus too much on this fee outlook in the short term because there is still "impressive growth" in Sprott's product line-up," and the firm is still attracting assets when "most competitors are not."

Toronto-based Sprott reported a 4.1 per-cent profit increase in the latest quarter as the investment firm racked up $655-million in net sales mainly from two listed closed-end funds. The firm raised $220-million from its launch of the Sprott Strategic Fixed Income Fund , and $306-million from a follow-on offering in its Sprott Physical Gold Trust , a gold bullion fund.

The new sales, however, were partly offset by market depreciation in existing investment funds because of the market turmoil. Assets under management, however, rose to $9.9-billion at the end of September from $6.5-billion at the same time a year ago.

Profit in the third quarter rose to $10.4-million, or 6 cents a share, from $10-million, or 7 cents a share, a year earlier. Revenue rose 52.4 per cent to $44.3-million from the previous period.

While the firm delivered strong financial results, Mr. Grosskopf was disappointed with the firm's investment performance. "Our funds performed well during the majority of the quarter, but they did not escape the broad market downturn that we experienced in September, and most of our funds recorded losses that month," he said.

The flagship, resource-heavy Sprott Canadian Equity mutual fund is off 16 per cent this year to Nov. 9, while Sprott Gold and Precious Metals Fund is down 17.5 per cent. The lower-margin Sprott Gold Bullion fund, however, is up 26.5 per cent because the price of gold surged to a record high over $1,900 (U.S.) an ounce in early September before retreating.

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Recent investment performance has suffered "because we were not positioned in U.S. treasury bonds," he lamented. "Who would have guessed that if the U.S. got downgraded, treasury bond markets would have rallied 20 per cent? Our view is of defensive positioning is that the bond market won't be a safe haven for that long."

The firm's stance has been to stick with bullion and precious metals stocks as part of the defensive positioning because of the risks to the financial system, but "that has not worked," he said. "There has never been a greater divergence between bullion-price performance and the performance of the underlying equities. So we are continuing to stay with that exposure because we think that it is going to correct."

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