Last updated: Mar-18-2019

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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Thursday, January 05, 2017

Difficult times call for different solutions. Given the downside volatility of the resource sector over the past few years, Jason Mayer of Sprott Asset Management LP in Toronto, lead portfolio manager (with Paul Wong) of the Sprott Resource Fund, has adopted a two-pronged strategy that combines both top-down and bottom-up components, with some pretty remarkable results.

“What we do is take a bifurcated approach with two general sleeves,” says Mayer. “One sleeve is based on bottom-up stock picking, while the other is from a top-down perspective. This way, we believe that over an extended time frame – two to five years – we can keep our eye on the prize [of long-term capital growth], but in the interim, we can take advantage of developments in the marketplace.”

Take advantage indeed. While natural resource funds overall turned in a three-year average annual compounded rate of return through Nov. 30, 2016, of just -0.6% despite a gain of 31.9% in the most recent year, the Sprott Resource Fund returned an annualized 12.9% over the same period, with a stunning 80.9% return for the most recent year.

“This fund is run differently from any other fund I know of, and so far, the strategy seems to be working,” says Mayer. “We have the returns, but we’ve also been able to manage the downside risk.”

Mayer adds that while the fund portfolio typically contains 30 to 40 names, it’s hard to find 30 to 40 really good resource companies, so the tactical top-down component enables them to step outside that limitation by seizing opportunities as they arise. “For example, we saw a good run developing in base metals and wanted to capture it,” he says. “We were able to trade tactically and managed to catch part of it. At the same time, it added diversification and complemented the rest of the portfolio.

“We try to figure out how much to allocate to core versus tactical investments while keeping an eye on risk,” says Mayer. “Usually 40% to 60% of the portfolio is dedicated to finding Alpha, but the cash component can go as high as 20%. We’re still cognizant of the need not to go all in, though,” he adds. “With commodities you can always be wrong, and the cost of being all in can be disastrous.”

The dual strategy has resulted in picks like Vancouver-based uranium producer NexGen Energy Ltd. (TSX: NXE). “They have one of the most attractive uranium discoveries globally in the history of uranium mining,” says Mayer, adding that with uranium trading at multi-year lows, investors who are mainly “cash flow pickers” have been ignoring the long-term value of this “world class” asset.

Another addition to the portfolio has been Calgary-based Ikkuma Resources Corp. (TSV: IKM), a junior oil and gas company that recently made a large oil discovery in the Foothills region of Western Canada. “The market failed to react, but they have since drilled another well, and this is a very significant discovery,” says Mayer. “It’s going to cause the market to pay attention, so this one is pending.”

As for the overall direction of the resource markets given the recent uptick in performance, Mayer says “it depends on the commodity, but the three most interesting ones are zinc, oil, and natural gas.”

“Zinc is a supply side story,” Mayer adds. “Supply has been depleted, and this will put upward pressure on prices. As for oil, it’s contingent on Opec following through on their commitment to reduce production. And while natural gas demand is dependent on weather, supply is depressed, but demand is already at record levels.”

While there are bright spots, Mayer is guarded about the overall global economic situation. “Debt levels are high everywhere – China’s debt-to-GDP ratio has almost doubled since 2009 – and populations continue to age. We’re not expecting economic calamity, but we think we’ll see many years of tepid economic growth globally, so we are investing accordingly.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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