For years, the knock on investment manager Sprott Inc. was that it's a one-trick pony. If you're bullish on precious metals and the companies that mine them, Sprott is your kind of firm, given its heavy bets on the sector. That's great when mining stocks are doing well. Lately they haven't been, and Sprott has struck out. Luckily, however, this pony is trying to teach itself a few tricks.
Sprott's third quarter numbers, reported Wednesday, point to some of its ongoing challenges. As of Sept. 30, the firm's assets under management surpassed $10-billion, up 13 per cent so far in 2012. But behind that impressive tally lies the real story. Investors have turned away from miners like Barrick Gold Corp. and chosen instead to invest directly in the precious metals themselves. So Sprott now offers bullion funds – exchange traded funds that simply buy and hold physical gold and silver. These have been enormously popular – Sprott has sold $1.3-billion worth of bullion ETFs this year and has more planned. Bullion funds now account for fully 46 per cent of Sprott's assets under management, up from nothing in early 2009.
The problem is that Sprott earns tiny management fees on bullion funds. It charges far more for managing its hedge funds, offshore funds, mutual funds and private accounts. The size of these holdings has shrunk over the past 12 months by more than $1.1-billion – close to half of that in net redemptions. As a result, Sprott's management fees fell by 21.1 per cent through the first nine months of 2012, year over year.
The story is even worse in what should be the truly precious part of the business: performance fees. The way Sprott's business is structured, it can earn fat performance fees when its managed investments do well, but little to nothing when they don't. Mining stocks did well in 2010, and so did Sprott, earning $200-million in performance fees. Last year that number shrank to $5.3-million. So far after nine months, it's a piddling $186,000 (did we mention bullion ETFs don't pay performance fees?). Performance fees drive the stock; no wonder Sprott shares are down by 40 per cent in the past year.
Mining stocks will undoubtedly rebound, but the way things have been going, Sprott is quickly on its way to becoming little more than a low-fee-earning Fort Knox. So credit Sprott management, led by master investor Eric Sprott and CEO Peter Grosskopf, for recognizing that the firm needs to diversify. Sprott recently bought Flatiron Capital Management Partners, a firm that specializes in arbitrage on convertible debt, and a pair of affiliated firms known as Toscana Companies that specialize in alternative investments in the oil patch. Together the two firms account for less than 5 per cent of Sprott's assets under management, but this is a good start and a sound strategy, to build Sprott into an alternative investment specialist whose fortunes don't rely solely on silver and gold.
Sean Silcoff