Sprott profit falls 26 per cent as assets tumble

Date: Friday, March 27, 2009
Author: Shirley Won, Globe and Mail

Sprott Inc. Thursday reported a 26-per-cent drop in fourth-quarter profit as the investment firm suffered significant redemptions from offshore clients, while assets tumbled in the market meltdown.

The Toronto-based investment fund company posted a profit of $20.4-million, or 14 cents a share, for the period ended Dec. 31. That's off from $27.6-million, or 21 cents a share, a year earlier.

The latest quarterly profit came in below consensus analysts' expectations of 17 cents a share, according to Thomson One Analytics.

The fourth-quarter saw assets under management decline to $4.4-billion from $6.2-billion a year ago.

“In the offshore funds, there was a great sense of indiscriminate redemptions,” Sprott's chief executive officer Eric Sprott told analysts in a conference call.

He suggested that many of those clients were financial institutions, which owned the Sprott investments in fund-of-funds portfolios, and were involved in a de-leveraging process.

“We can tell you our redemptions in our offshore funds are very minimal these days,” Mr. Sprott added. “It kind of peaked in November, and has been going down markedly ever since.”

On the other hand, “our Canadian clientele is very sticky – it's more individuals than institutions,” he said.

Total revenue for the latest quarter plunged to $57.7-million from $163.3-million in the prior year. Management fees declined by 30 per cent to $21.7-million due to the 19-per-cent drop in assets under management. Performance fees fell by $85.3-million to $42.4-million.

Mr. Sprott, who is well-known to be bearish on the stock market and bullish on gold, said his team was “somewhat shocked that the long-only funds [at Sprott] did as poor as they had done” in 2008 given that they foresaw the market downturn, and predicted the financial crisis.

The firm's main hedge funds fared better last year as they had “big shorts” in financial, housing and consumer discretionary stocks, he noted.

“We have had a little bit of a setback with our hedge funds in March with the market rallying and gold not really doing too much, but it's not important to be right on a quarterly basis.”

Peter Hodson, a Sprott portfolio manager, told analysts that most of the firm's long-only funds – particularly Sprott Gold and Precious Metals Fund – have done well in the first two months of the year. “There has been a nice small-cap recovery,” he said.

“Given our history of strong performance and our fund performance in the first part of the year, we believe that we are well positioned to generate performance fees in 2009 and beyond.”

As part of the firm's growth strategy, he said the firm is launching more products like the Sprott Gold Bullion Fund started last week. “It's an easy cost-effective way of holding physical gold,” said Mr. Hodson. “In less than a week we are close to $50-million in assets in this particular fund.”

Sprott next week is also launching a fund of funds that will be sold only to the Federation of National Specialty Societies of Canada – a group of Canadian medical specialists.

In 2008, meanwhile, Sprott saw profit rise 23 per cent to $52.1-million, or 36 cents a share, from $42.3-million, or 32 cents a share, a year earlier. The company, which has over half of its assets in hedge funds, had net sales of $95-million last year.