Sprott's Canada Stock Fund Favors Gold Bars, Cash: Taking Stock
March 31 (Bloomberg) -- Eric Sprott has transformed his Canadian Equity Fund, the best performer in Canada for the last five years, into what might be described as the Canadian Equity, Gold and Cash Fund.
Sprott, 59, is so bearish on the stock market that he won an exemption from an Ontario Securities Commission rule that prohibits mutual funds from holding more than 10 percent of assets in bullion.
The fund has 16 percent of its C$335 million ($256 million) of assets in gold bars, stored in bank vaults in Toronto. Another 27 percent is in cash.
Rising oil prices will crimp consumer spending and depress corporate earnings, ending a rally that's lifted the Standard & Poor's/TSX Composite Index by 35 percent in the past 12 months, in his view.
The fund owns shares of PetroKazakhstan Inc., an oil producer in Kazakhstan, and Thunder Energy Inc., a producer in western Canada. Sprott is opening a new fund in April that will focus on energy stocks.
``There's going to be some carnage,'' he said. ``That's what we're trying to protect against.''
The Sprott Canadian Equity Fund returned 44 percent annually for the past five years on average, trouncing the 6.8 percent return for the S&P/TSX. The performance is the best among 512 Canadian funds tracked by Bloomberg.
Oil and Gas
Along with the gold and cash, the fund has 28 percent of assets in mining stocks and 20 percent in oil and gas companies, said Sprott, overseeing the equivalent of $1.12 billion as chief executive officer of Sprott Asset Management Inc. in Toronto. Stock investments in other industries account for the rest.
``In a really bad market sell-off, all stocks go down,'' he said. ``There's less risk owning the metals than the stocks when things get bad, even though they don't give you the same upside.''
Sprott began in the investment business 33 years ago as an analyst at Merrill Lynch & Co., and later ran his own securities firm. He was a bull until 1999, when he decided that too many new shares of companies were being sold. He started buying gold and miners of the metal.
In October, his fund became the first to win an exemption from the securities commission that allows it to hold up to 20 percent of assets in gold bullion.
$500 Gold?
Gold has surged 64 percent since February 2001. The rise will continue because there's not enough supply from mines to meet demand from consumers such as jewelry makers, Sprott said.
The precious metal's price may climb to $500 an ounce this year as investors realize the stock-market rally in the past year is a break from the declines of 2001 and 2002, not the start of a new bull market, Sprott said.
Also, he cited the weekly ABC News/Money magazine consumer confidence index as evidence that there may be a recession ahead. The index slid 18 points in eight weeks from Jan. 26 to March 15.
There have been two recessions in the U.S. since the poll's inception in 1985: from July 1990 to March 1991, and from March 2001 to November 2001. The reading dropped 11 points in four weeks in 1989, and 14 points in nine weeks in 2001.
``It's not difficult to imagine why a consumer would be upset these days,'' Sprott said. ``You don't like what's happening to you on the geopolitical front, and you don't like what's happening when you go to the gas pumps or get your gas bill. The jobless recovery is an element of it too.''
Raising Cash
Sprott decided the market's losses may be so big that gold stocks wouldn't be sufficiently safe. He expects declines to be sharp enough that investors will sell shares without considering the companies' earnings prospects.
``When there's a steep decline, people tend to sell whatever they have to raise cash,'' he said.
He said he's not sure how long or steep any slide might be. He attributes part of his success to ignoring benchmark indexes such as the S&P/TSX, the yardstick against which most Canadian stock-fund managers are judged. The only index he watches is the American Stock Exchange's Gold Bugs Index, which tracks 15 gold- mining stocks traded in U.S. markets.
``We do a few things differently,'' he said. ``We don't look at the (S&P/TSX) index, and we seriously overweight things that we believe in.'' Producers of raw materials, including metals, account for 17 percent of the S&P/TSX's value. Energy shares account for 14 percent.
Hubbert's Theory
Sprott said he's starting the Sprott Energy Fund in part because crude-oil prices may surge another 69 percent, although he didn't say by when. Crude for May delivery closed at $36.14 a barrel on the New York Mercantile Exchange yesterday.
``It's not going to surprise us to see oil at $50 or $60 a barrel,'' he said, citing a theory called Hubbert's Peak. The theory, as interpreted by some academics, argues that world oil production will reach a zenith next year and then decline. The projection is based on research by the late M. King Hubbert, a geophysicist for Shell Oil Co. who correctly forecast in 1956 that U.S. oil production would peak in 1970.
Higher energy costs mean less money for consumers to spend and increased cost of goods for companies. Sprott forecast that the effect may crimp earnings in all sectors.
The fund's holdings will include PetroKazakhstan and Cameco Corp., the world's largest producer of uranium used to generate nuclear power.
Sprott stands out in the money-management industry for his willingness to make outsized bets, according to investors such as Jim Hall, who helps oversee the equivalent of $990 million for Mawer Investment Management Inc. in Calgary.
``When he sees something, he's not afraid to ride it,'' said Hall, who knows Sprott from his days in the brokerage business. Such big bets aren't the norm because if the investments don't pan out, a fund can lag competitors, said Hall.
``There's a tremendous business risk in doing that,'' he said. ``A lot of people don't want to bear it. His clients probably understand that.''
Last Updated: March 31, 2004 00:06 EST |
