Eric Sprott, Chairman and CEO of Toronto-based Sprott Asset Management Inc., is applying his analytical and strategic skills to assemble what he calls a “Murderers’ Row” of top-performing fund managers.

“We’re putting together a team of long-ball hitters,” Sprott says of the comparison to Major League Baseball’s 1927 New York Yankees. (“Murderers’ Row” was the nickname given to the lineup of heavy hitters that included seven players who would become Hall of Famers, including Babe Ruth and Lou Gehrig.)

“These guys have proven they can put superior performance on the table year after year,” Sprott says of SAM’s fund managers. “Performance is everything in this business, and our intention is to hire great people who allow us to add to our lineup of funds.”

Sprott’s latest coup is nabbing portfolio managers Charles Oliver and Jamie Horvat from AGF Funds Inc. The two contributed to the management of five top-performing AGF funds with combined assets under management of $2.6 billion. AGF Precious Metals Fund, which they co-managed, won the 2007 Canadian Investment Award for the Best Precious Metals Fund this past November.

These additions follow SAM’s hiring this past August of Allan Jacobs and Peter Imhof, the team behind the stellar performance of Sceptre Equity Growth Fund and other small-cap mandates at Toronto-based Sceptre Investment Counsel Ltd. Jacobs took home Morningstar Canada’s award for Fund Manager of the Year in 2006.

In the past couple of years, SAM has also hired Peter Hodson, who made his name at CI Investments Inc. and Synergy Mutual Funds Inc. (both of Toronto), as well as Sylvain Ratelle, a hedge fund specialist who last hung his hat at Fiduciary Trust Co. of Canada, a subsidiary of Toronto-based Franklin Templeton Investments Corp. Ratelle is pulling the strings at SAM’s global equity and global hedge funds. As for Hodson, he manages Sprott Growth Fund, which had a sizzling return of 35.1% for the year ended Dec. 31, 2007 — far ahead of the S&P/TSX composite index’s 5.8% return.

“There are a thousand ways to beat the market. And although all of our managers have totally different styles, they have each honed a specific skill that allows them to outperform,” Sprott says. “The important thing is to master a technique. All of our managers have come to us with great performance records, and there’s no reason why that can’t continue.”

The newcomers join long-time SAM portfolio managers Anne Spork, who co-manages all of Sprott’s portfolios, and Jean-François Tardif, lead manager of three SAM hedge funds. Sprott himself, who manages $4 billion of the firm’s $6 billion in AUM, has set the tone for SAM with an impressive track record on the firm’s biggest fund. His $2-billion Sprott Canadian Equity Fund earned a hefty 28.1% average annual compound return for the 10 years ended Dec. 31, putting it first among 1,532 mutual funds with a 10-year track record, according to Morningstar Canada. The fund’s performance tripled the comparable 9.5% average annual return for the S&P/TSX composite index.

Sprott, who is about as far from an index-hugger as a manager can get, currently has 40% of the fund’s AUM in precious metals stocks and bullion; 30% in energy, including uranium, coal, oil and gas and alternative energy; 20% in other sectors; and 10% in cash.

“We are not guided by the unwritten rules of the business,” Sprott says, referring to most fund managers’ unwillingness to stray too far from the indices. “People say we’re a commodities fund, but, in fact, we go with what’s working. And that’s what’s working right now. We are out there hunting for new ideas every day.”

Although Sprott Canadian Equity Fund is not a hedge fund, it has the mandate to go short in up to 20% of its portfolio and it is now running a short position of about 8%. Among the short positions are Canadian banks, which Sprott believes have farther to fall as a result of the global credit crisis.

Sprott’s team looks for companies that he calls “multi-baggers” with the potential to increase in value by “500%, 1,000% or more.” The firm’s hottest holding in the past year has been Timminco Ltd., the share price of which soared by more than 4,000%. Timminco produces metallurgical silicon for solar panels and is held in various SAM funds. Sprott acknowledges that even though favourites such as Timminco could decline at times when the stock market turns bearish, his goal is to protect portfolio returns. He aims to do this by using hedging strategies such as short-selling, holding extra cash when he sees fit and seeking companies that stand to benefit from whatever market forces are at play.

@page_break@Sprott believes that declining world production of conventional oil and rising Asian demand for resources and agricultural products are long-term trends that bode well for producers of these commodities, even if there is a recession. And although Sprott is worried about the fragility of the excessively leveraged financial system, he thinks gold will benefit from the inflationary blizzard of easy money that’s being created by governments attempting to avoid a financial meltdown.

“There’s an aggressive, ‘go for it’ mentality at Sprott,” says Rudy Luukko, investment funds editor with Morningstar Canada in Toronto. “[Fund] managers like the environment he has created. Sprott takes the shackles off his managers.”

The environment at SAM is collegial, yet competitive. The fund managers meet every morning and focus on what’s changing in the economy and how it affects the investment outlook. The goal of the meetings is discussion, not consensus, Sprott says. Hodson, for example, employs a bottom-up growth style, while Jacobs is a strict value investor. Ratelle employs what Sprott calls a “statistical, black box” approach.

“Our managers can do exactly what they think they should do,” Sprott says, “and we can learn from each other.”

Sprott has been rapidly augmenting his powerhouse team, but, as he says, “You can never have too many smart people.” He also hints there could be more hiring and some new funds to come. And by bringing in fund managers several years younger than Sprott himself, who is 62, and chief investment officer John Embry, who is 67, Sprott is injecting some young blood into SAM.

Eventually, Sprott will need to make a decision on how to capitalize on the firm’s value; it could be through a public or private stock issue or even the eventual sale of the firm, he says. Going public would also allow Sprott to compensate his portfolio managers by offering them the enticement of shares in a publicly traded, fast-growing firm.

SAM’s managers are currently well paid through private ownership stakes in the firm as well as performance-related incentives. The Sprott funds are known for their high management fees, and managers get a share of the growth in their funds’ AUM. For the Sprott hedge funds, fees are based on a standard management expense ratio of 2.5% plus 20% of any percentage return greater than zero. Sprott Canadian Equity Fund charges a 2.5% MER, plus 10% of the amount by which the fund beats the S&P/TSX composite index. There are 13 Sprott funds offered in Canada, seven of which are hedge funds. The newest fund is Sprott Global Market Neutral, launched this month and managed by Ratelle.

“Performance-based fees are a significant factor for our company, and allow us to pay our guys more,” Sprott says.

Sprott’s investing style is to “tiptoe in,” starting with little positions in a lot of small companies. He will then buy significantly more if his theories unfold as expected.

Sprott’s tendency to take huge positions in some companies has raised liquidity concerns, though, and caused some observers to call his style “a high-wire act.” But Sprott refers to his methods as a mix of “conservatism and aggressiveness” and points to his avoidance of Nortel Networks Corps. and income trusts.

“We’ve experienced over and over that when you invest wisely, little companies become big companies,” he says. “When things go well, you can always sell. When you hit the ball out of the park, everybody wants it.” IE