Sprott says redemptions loom

Date: Friday, November 7, 2008
Author: Shirley Won, Investment Reporter, GlobeAdvisor.com

Eric Sprott expects more redemptions in his firm's hedge funds from international investors soon, which he says could "ultimately be significant."

"Most of the owners of the offshore hedge funds tend to be international financial institutions," the chief executive officer of Sprott Inc. told analysts yesterday.

"Those are the same institutions with issues," he said, referring to the global credit crisis that has also roiled stock markets around the world.

"There has been nothing significant to date, but as we get to November and December, we may see some bigger redemptions," he said. "So far, the redemptions in our domestic funds [held mostly by individuals] have been very modest."

Mr. Sprott made the comments after the Toronto-based money manager's third-quarter results missed analysts' expectations.

The firm reported a profit of $3.7-million or 2 cents a share, compared with $3.5-million a year ago when it was a private company. Analysts polled by Thomson Reuters First Call expected 7 cents a share.

During the quarter ended Sept. 30, assets under management tumbled 27 per cent or $2.1-billion to $5.6-billion as the market carnage shaved off much of the market value. Net sales came in at $122-million.

"Our long-only funds have been significantly affected by the market," but the hedge funds have done better because of their short positions, he said.

Mr. Sprott's said his bearish view on financial stocks has borne fruit with the collapse of venerable U.S. financial institutions, but his bullish outlook on gold has yet to take hold.

"If certain things unfold as we expect, it's not out of the realm for us to imagine that gold could go to $1,500 (U.S.) or $2,000 an ounce," he said.

Much of Sprott's assets are concentrated in the small- to mid-capitalization resource sector that has taken a beating in the market meltdown.

"The end of the quarter provided no relief for Sprott as market volatility escalated during October and has led to some staggering losses," GMP Securities analyst Stephen Boland told clients yesterday.

The analyst downgraded Sprott shares to a "hold" rating with a one-year target of $3.75 (Canadian), and slashed his estimate for Sprott's assets at year end to $4.6-billion.

The stock has plunged 65 per cent from its initial public offering of $10 in May.

"There is a very real chance that Sprott will have difficulty earning meaningful performance fees in fiscal 2008, and possibly in fiscal 2009," Mr. Boland cautioned.

Sprott managers can earn performance fees on both mutual funds and hedge funds if they hit certain benchmarks.

"We believe, that due to the poor performance of Sprott's funds as well as a less optimistic outlook for commodities, Sprott could experience a meaningful amount of net redemptions in the near future," Mr. Boland warned.

"We believe many of the hedge funds have a 45- to 90-day redemption notice time, which based on the downturn, may create redemptions in the fourth quarter."

As of Wednesday, the Sprott Opportunities Hedge Fund LP, run by Jean-François Tardif, was up 0.9 per cent year to date, while the Sprott Hedge Fund LP II, run by Mr. Sprott, was only down 3.7 per cent. The S&P/TSX composite fell 31 per cent in the same period.

"The break-even line is not a bad resolution to a market that has fallen as much as it has around the world," Mr. Sprott said.

Most of the mutual funds, however, are sharply in the red. They include the flagship Sprott Canadian Equity Fund, down 47 per cent; Sprott Gold and Precious Metals, 66 per cent; Sprott Energy, 59 per cent; Sprott Growth, 70 per cent and Sprott Small Cap Equity, 50 per cent.

Earlier this week, Scotia Capital Inc. analyst Phil Hardie, who has an "underperform" rating on Sprott stock with a one-year target of $3.25, said he did not see Sprott's third-quarter results as "particularly relevant given the significant deterioration in the capital markets since that time."

Mr. Hardie is looking for Sprott's assets at year end to fall to roughly $4.2-billion. "We believe the recent volatility in the resources sector may cool near-term demand for resource-oriented funds, despite Sprott's impressive long-term record," he wrote in a report.

Sprott Inc. (SII)

Close: $3.50, up 22¢