Sprotts sound investment history sweetens offering

Date: Wednesday, April 9, 2008
Author: Andrew Willis, Report on Business

As Michael Lee Chin has demonstrated over the years at AIC, it's better to own the fund company than the fund.

AIC has made a bundle holding stakes in rival wealth managers and will have another place to invest, as Sprott Asset Management prepares to go public. Seldom has an IPO so perfectly captured the spirit of the market.

First, there's the founder, 63-year-old Eric Sprott, and gold-bug sidekick John Embry. They have been so right on commodities, so many times, that this fund manager can legitimately claim to be a proxy for high-quality resource plays.

Mr. Sprott knew moly before anyone else had heard of her - that would be steel alloy molybdenum. Sprott Asset was long uranium plays when the rest of the world was still obsessing over Three Mile Island. Mr. Embry famously called bullion's run to $1,000 (U.S.) an ounce - though he may have first made the call while still in grade school.

This staggering track record means every resource company makes a stop in Sprott Asset's offices to tell its story. Holding this high ground makes it easier to spot the next big thing in mining or energy. And this is still a commodity-led market.

Then there's the contrarian streak. Since August, investors have been sand-bagged by a series of disappointments from the supposedly blue-chip banks. Sprott Asset was making nasty predictions about credit markets before the credit crunch began, and selectively shorting banks for months. This team has credibility, a quality that's sorely lacking in financial services these days.

Now, consider for a moment the contrast of owning Sprott Asset, the company, against one of its underlying funds. We'll look at the flagship $2.2-billion Sprott Canadian Equity Fund. The fund has stellar 10-year numbers, averaging 28-per-cent returns.

But some investors are going to be thrown by its volatility. The fund was up by 100 per cent in its best year on record, but fell 39 per cent in its worst year. Not all of us sleep well on getting word that our savings are down by a third.

Own the money manager, and you get exposure to the whole family of fee-producing Sprott Funds, which should mean a smoother ride. Money managers are extremely profitable franchises. Demographics are working their way, as the boomers save for retirement.

The tension in this IPO will come when Sprott Asset executives press for a premium price, while investors look for a bargain. That tug-of-war will become clear when a prospectus emerges, likely in the next week.

If the fund company is priced at a reasonable multiple to its performance-based fee income - something less than what investors paid last summer for comparable U.S. hedge fund Och-Ziff - then AIC and a whole lot of other investors will step up.