Tops in Rocks

Globe Investor Magazine, September 18, 2008

Charles Oliver and James Horvat

Photograph by May Truong

These two guys don't just work together, they think together. Business partners since 2004, Charles Oliver and Jamie Horvat are a hive of ideas, market theories and collected wisdom. Now running the precious metals fund at Sprott Asset Management, they share an office, feed off each other's opinions and finish each other's sentences.

"We've always had a like-minded approach in our analysis and in investing," says Horvat, a 36-year-old mechanical engineer by training who helped design auto parts and forestry equipment before switching to mutual funds. "We're always pushing each other to prove where we're wrong rather than where we are right." Armed with more than two decades of industry experience and a geology degree, Oliver, 45, doesn't mind sharing the decision-making or limelight with his younger colleague. The duo approach, he believes, leads to sharper stock-picking. "Two minds are better than one," he says.

Together, the pair hold deep convictions about the market, commodities and the prospects for resource stocks. For starters, they're vehemently opposed to corporate hedging (selling forward metal production at set prices) and share a faith in the fundamental value of gold rather than government-issued currencies, particularly in times of economic crisis and geopolitical turmoil. Last year, Oliver vowed to shave Horvat's head if the bullion price failed to reach $1,000 (U.S.) an ounce. While his partner's dark locks have so far escaped the clipper, Oliver has since upped the ante, promising to shave his own head, as well, if gold doesn't top $2,000 an ounce within four years.

Oliver and Horvat are also "peak oil" theorists, believing the world's crude production will soon reach its apex and shift into a permanent decline. Commodities, they say, are in an unprecedented boom that will last for years because of sustained strong demand from the rapidly industrializing economies of China and India, and years of underinvestment in mineral exploration.

Plenty of fund managers claim to have been early believers in the strength of the current commodities bonanza, says Yamana Gold CEO Peter Marrone, but he maintains that Oliver was the real deal, correctly predicting the so-called supercycle years ago. Oliver's unwavering conviction that things really were going to be different this time around even helped change Marrone's own views. "I became a convert, and Charles would have been one of the people whose comments resonated with me," he says.

The comings and goings of mutual fund managers rarely make headlines. But when Oliver and Horvat defected from AGF Funds (where they had originally paired up) to join Sprott Asset Management in January, plenty of ink was spilled about Sprott's coup. After all, the duo were highly decorated stars of the industry: As co-managers of the AGF Precious Metals Fund, they won the Canadian Investment Award for the top precious metals fund in 2004, 2006 and 2007. The fund returned 104% in 2002 (under Oliver's management but before Horvat's arrival), 19% in 2005 and 64% in 2006.

Like their new boss, Oliver and Horvat take an unconventional approach to investing. Even in the generalist funds they managed at AGF, they eschewed financial-industry stocks and leaned heavily toward mining, energy and materials issues. At times, Horvat concedes, they faced plenty of skepticism from potential investors. "Everyone thought we were nuts," he says with a grin. The subprime mortgage crisis, the collapse of Bear Sterns and the sell-off in banking stocks soon after proved them right.

They have a kindred spirit in the investment company's founder, resource guru Eric Sprott, whom they've admired for years. "Eric used to come and talk to us at AGF as a strategist," Oliver says. "A lot of the stuff he was talking about wasn't the mainstream stuff you were hearing from economists. But I thought he was right."

Sprott tends to focus on small-cap resource stocks rather than established commodity producers. That suits Oliver and Horvat just fine. They're bullish on the beleaguered junior mining sector, which has struggled amid the credit crunch despite strong commodity prices.

As for the vicious sell-off that savaged nearly all resource-focused funds over the summer, Oliver concedes it's been tough. The duo's belief in bullion and the fundamentals, however, remain deeply etched. "The views are still all positive. Everything is in place. It's just a matter of getting the market to go along. Sometimes these markets don't follow through on what we deem to be the logical conclusion. Usually that's just time and patience," Oliver says. Horvat adds that if investors are brave enough, current conditions present a real buying opportunity.

"Now is the time to take that relatively strong Canadian dollar when there is maximum fear in the marketplace and buy some really good companies at depressed fear valuations," he says. Oliver boils down their investing formula to a few key maxims: "Not listening to everybody. Having independent views. Saying, 'I think resource stocks are cheap and bank stocks are risky,' and then acting upon those things rather than indexing." And, of course, ensuring their ideas pass muster with their biggest critics: each other.