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Globe Investor Magazine, Feb. 21, 2008
By Rob Carrick
Photographs by Lee Towndro
It's 8:15a.m. and the day is unfolding as it always does in the 26th-floor Bay Street offices of Sprott Asset Management. Sitting around a huge boardroom table, analysts and portfolio managers toss out factoids and ideas gleaned from their research, while the CEO of the firm, Eric Sprott, takes notes in a spiral-bound notebook. Declining global oil reserves are discussed, as are gold prices, solar energy, the value of General Motors shares, and milk. Yes, milk. Analyst David Tomljenovic broaches the topic as a result of some reading he's done about a growing milk shortage caused by rising consumption in emerging economies like China and India. "Milk is the new gold," Tomljenovic offers.
Despite the many paintings and sculptures that adorn the premises, a first glance at the dozen or so people around the table suggests that Sprott Asset Management is a fairly informal place to work. There's a mix of suits and office casual attire, and a collegial flow of banter as Eric Sprott guides the session with questions and comments. But there's also a feeling of tension, of wanting to say something that piques the interest of a boss who is good-natured and sociable, and yet intimidates with his obvious grip on market developments. The milk-as-gold idea is the sort of thing that might conceivably appeal to Sprott, manager of the amazingly successful Sprott Canadian Equity Fund and a keen prospector for investing themes with a future. Sprott was buying gold back in 2000, when it traded below $300 (U.S.) per ounce and few people envisioned the $800 prices we've seen recently. He took a shine to uranium in 2003, on the cusp of a gradual 10-fold price increase, with the expectation that nuclear power will have a big future in an era of high oil prices. Lately, his search for the next big score has led him to stocks in commodities like molybdenum, phosphates and silicon. "When looking at a stock, we ask, 'What could happen that would make this thing triple or quadruple or quintuple?'" Sprott says, later, after the meeting. "We're a sucker for big things. If someone says, 'I have something big,' that appeals to us."
There's an outsized aspect to much of Sprott's world: his collection of native Indian and Inuit art, his conviction that the financial system is in big trouble, and his returns as manager of Sprott Canadian Equity. And yet, his success as a fund manager has come from investing in tiny, speculative stocks that rocket higher. Finding these grains of sand with a future requires the sort of work done by Tomljenovic, a 38-year-old former investment banker and consultant who has studied history at the University of Western Ontario and earned both an MBA (University of Toronto) and a law degree (Osgoode Hall). Sprott Asset Management employs eight analysts like Tomljenovic, and competition is intense to supply the firm's portfolio managers with intelligence they can exploit. Tomljenovic found the "milk-is-the-new-gold" line in a recent article in the International Herald Tribune that referred to milk as a new symbol of rising prosperity in some countries. The idea leaves Sprott neither shaken nor stirred, almost as if it's a raw concept that needs further refining. But, no matter. Tomljenovic is coming off the sort of stock pick that helped the Sprott Canadian Equity Fund reach its 10th birthday last September as the No. 1 performer over the previous decade, out of a universe of almost 3,000 funds. The compound average annual return to Sept. 30 was a stunning 27.3%, compared to the 11.7% average achieved by Sprott's peer funds in the natural resources category (the fund is classified thusly because it currently has a heavy resource base, but Sprott is willing to go into most any sector). As of the end of 2007, the fund's average annual 10-year return was a chart-topping 28.1%.
Tomljenovic's killer stock pick was Timminco Ltd., a Toronto-based producer of light metals like silicon, which is used in solar panels. He found it about three years ago through a mix of tenacious research and personal contacts that revealed something staggering. Through an acquisition, Timminco had come up with a process to refine silicon that it had previously been selling for 90 cents per kilogram into something purer that could be marketed for $35 per kilogram.
The firm started buying Timminco around 40 cents per share, Tomljenovic recalls. The buying continued as the stock exceeded the $20 mark in the latter part of last year, making it far and away the top performer on the Toronto Stock Exchange, though it plunged back to the low teens in early 2008. "Maybe once or twice in your career do you get to be involved with a stock that can potentially do what this one has," Tomljenovic said. "It's the most exciting thing I've ever been involved with."
Sprott, 63, is driven enough to wake every day at 5 a.m. so he can brief himself on what's happening in the financial world. Three newspapers are on the menu: The Globe and Mail, National Post and The Wall Street Journal, as well as material gleaned from e-mails and websites. When you hear Sprott talk about the markets, the facts and figures spill out like the threads of a grand theory that explains how and why events are unfolding as they are. "There's no element of chance in what goes on here, it's very well orchestrated and it's hard work," said Tomljenovic. "And Eric is the hardest-working one of all. I know that, in the mornings, I better have read everything he's read and know everything about all of my companies because he's going to know just as much as I do, and he never wants that."
It's not unusual for money managers who play in Sprott's league to have a high-strung, slightly condescending, master-of-the-universe quality to them. But Sprott seems to be so relaxed in his daily routine that he's genuinely enjoying himself. Secure in his stature, he's quick to share the credit for Sprott Canadian Equity's success with analysts like Tomljenovic. "I've always had lots of analysts around," he says. "Analysts pay for themselves, right? If a guy can find one idea. Take the fact that we're in Timminco. Oh my god, the stock's up 5,000%."
The Sprott team lives for the Timmincos of the world, and has close to zero interest in everything else. Sprott won't touch the bank stocks that are stacked up like cordwood in most Canadian equity funds, because he's a confirmed stock market bear who thinks the financial sector's problems only began with the liquidity crunch of 2007 and stand to get much worse. There are plenty of blue-chip names in the resource sectors he favours, but he avoids them because their size precludes those giant share-price gains. "My favourite investment is to own 0.1% of something and have it become 30% of my portfolio," Sprott says. "We have a lot of those stocks that were really, really little and became winners."
Sprott Asset Management offers a dozen or so mutual funds and hedge funds that are run by an accomplished team of portfolio managers. Among them are Allan Jacobs, who built a sterling reputation running a Canadian equity fund for Sceptre Investment Counsel; gold bug John Embry, formerly of the Royal Bank of Canada fund family; and Peter Hodson, a growth-investing specialist who established his name at the Synergy fund family, and then moved to CI Funds after its purchase of Synergy. Hodson says Sprott Asset Management is unlike either of those firms: At CI, for example, he managed or co-managed five funds, and yet had no analysts assigned to help him. "Here, I have one fund and I have eight analysts who are specialists in their field, and their job is to find good stocks to buy, or short."
Hodson notes some cultural differences, as well. Sprott Asset Management, for example, has only a small, three-person team of wholesalers whose job it is to persuade investment advisers to use the firm's products for clients. The firm also doesn't do much marketing, although it has attempted to get some attention for Sprott Canadian Equity's 10-year numbers. "Eric's viewpoint is that if the performance numbers are there, the money will show up," Hodson says. "When I arrived at Sprott, we started up a new fund, and I asked, when do we go on the road show, when do we send out the baseball caps? Eric just looked at me like I was from another planet. He's like, 'We don't really do that here.'"
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