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A knack for picking the winners

Eric Sprott 'has produced returns that are off the charts'

In the Canadian mutual fund business, Eric Sprott is a Guinness Book of Records unto himself.

The smartest fund manager at seeing where the money's going to be made, not today, but tomorrow? Given his buying of gold, uranium and other minerals ahead of the current commodities boom, you can easily make a case for handing this honour to Mr. Sprott.

Longest winning streak as a money manager? Ditto.

Fattest returns for his clients? Ditto again.

"He has produced returns that are off the charts," Rudy Luukko, investment funds editor at the independent analysis firm Morningstar Canada, said yesterday.

Sprott Canadian Equity, the $2.2-billion flagship fund at Sprott Asset Management, had made an average annual 28 per cent for the 10 years to Feb. 28, which is double what other natural resource funds made. Mr. Sprott himself slots the fund in the Canadian equity category, where the 10-year return averaged 7.6 per cent.

The man behind these numbers is approachable and informal enough to wear an open-neck shirt around his 26th-floor Bay Street office. At 63, he's a proud collector of native Indian and Inuit art, and a philanthropist who has poured millions of dollars into a business school that bears his name at Carleton University, and into stem cell research at Ottawa Hospital (he was born in Ottawa).

He's also a stock market addict who ran a successful independent investment dealer before founding Sprott Asset Management and turning it into one of the hottest fund companies on Bay Street.

Arguably the most distinctive aspect of Mr. Sprott is his conviction about how to run money in these confusing times.

Sprott Canadian Equity, a fund he runs personally, is in some ways the key to understanding his views.

There are no bank stocks because he believes the financial system is stressed to the breaking point, and both energy and metals stocks dominate the portfolio because of his belief that commodities are where the value is in today's market. Also, there are no big blue-chip stocks because he prefers to buy the tiny names that to many would appear mere flotsam. Herein lies a criticism that is levelled against Mr. Sprott whenever his huge returns are discussed. Simply put, it's that he's a big risk taker.

"Positive numbers don't tell the whole story of a fund," Morningstar's Mr. Luukko said. "You have to look at what risks the funds took to get there. [Sprott] tends to down play the volatility aspect. He'll show these great results and say, really, wasn't this worth it? Look at the great results we've earned."

Sprott Canadian Equity did in fact plunge 39 per cent in the 12 months to October, 1998. But his wins as a stock picker overwhelm his losses. For example, he was an early investor in a company called Timminco, which produces silicon for use in solar panels. Mr. Sprott's firm started buying Timminco shares when they traded below $1, and they're now in the $25 range.

Calls like this help explain why there has been steady procession of fund managers defecting to Sprott Asset Management in recent years from other companies.

"One of the things that has impressed me is his ability to attract talent," Mr. Luukko said.

VERBATIM

"We'd done the work: we had a pretty good idea of what should happen. Eric Sprott on buying uranium before its price increased 10 times. In a recent interview with Globe Investor magazine, Mr. Sprott offered a glimpse of his money managing style.

"BUY GOLD."

On gold at $750 (U.S.) an ounce

"We don't like buying the big guy. We like buying the little guy no one else is buying. "

On buying obscure stocks.

"One of the things I like to compare our stock picking to is going to the garbage dump. There's a diamond covered with garbage and you say, 'Oh, my God, look at this thing.' You bring it out, buff it off, and it's a diamond, and it always was a diamond. It was just tarnished."

On his investing style

Market beater

Sprott's Canadian Equity Fund is the top performing fund in Canada and consistently beats its competitors and the TSX.

1-year returns10-year average annualized total return
Sprott Canadian equity18.75%28%
MacKenzie Universal Canadian Resources26.07%18.07%
RBC Canadian equity5.44%5.50%
S&P/TSX composite index4.55%7.8%*

Returns to Feb. 29,2008; * total return from April 30, 1998 to March 31, 2008

DOUGLAS COULL/THE GLOBE AND MAIL; SOURCES: GLOBEFUND.COM AND BLOOMBERG FINANCIAL SERVICES

Canada's wealthiest

Net worth (U.S. billions)

1. David Thomson

and family: $18.9

2. Galen Weston

and family: $7

3. James, Arthur

and John Irving: $6.7

4. Ted Rogers:$5.7

5. Jim Pattison: $5.5

6. Paul Desmarais: $4.6

7. Mike Lazaridis: $3.6

8. Jeffrey Skoll: $3.6

9. Jim Balsillie: $3.4

10. Barry Sherman: $3.3

Source: Forbes

© 2007 The Globe and Mail. All rights reserved.

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