I got a question from several readers about this fairly quiet pitch from Eric Fry over the weekend, and it rang a little bell so I thought it was worth a little check-in… this is what Fry says about the business of asset management…
“‘Gather assets under management… and bill them.’ That’s how a money manager from Greenwich, Connecticut, once described his business plan to me.
“A nearly identical strategy drives the success of the money management firm that specializes in precious metals investments that I recommended to members of my elite trading service, The Speculator, earlier this week. This firm manages several precious metals exchange-traded funds (ETFs), as well as funds dedicated to stocks in the precious metals sector.”
I’ve never looked at a pitch for The Speculator before, but it seems to be a relatively high risk trading letter… so what is it that Fry is hinting at?
Most of his ads are about the “Technocasm” and the big accelerating technology trends, but this appears to be much more of a bet on precious metals… with the timeliness of this story hitting last week being that a week ago, we were all wondering whether the Reddit crowd would find any success in causing a “short squeeze” in silver futures.
Silver popped 15% or so on that excitement, though it has come back down a little, and I imagine the short squeeze story will be short-lived on that front… but silver is certainly the most volatile of the precious metals, and we’ve seen big spikes before. So you never know.
And here’s how he sees that turning into profit:
“If investors expect precious metals prices to rise, they will commit capital to them. Then this firm will collect its management fees on those investments… no matter what gold and silver actually do.
“This attribute makes it a unique play on precious metals.”
Other hints? This is a “Toronto-based firm,” and we get these tidbits:
“The Toronto-based investment firm serves more than 200,000 global clients and manages approximately $17 billion. Most of that capital resides in the company’s four physical bullion ETFs. Unlike many competing precious metals ETFs, this company holds physical bullion, not simply paper claims on the metal.
“In addition to these physical bullion trusts, it manages four other publicly traded investment vehicles: two gold stock ETFs, a value-focused closed-end fund, and a resources-focused investment company.”
And apparently they did well last year, with assets under management rising 73% in the first nine months of 2020, and Fry sees another surge in the final numbers for the fourth quarter… which he says will come out on March 1.
The bet, then, is apparently both that silver and gold will rise… and that investor enthusiasm for these metals will spike higher, driving funds into this firms ETFs and sending assets under management higher. Owning an asset manager in a hot area is certainly a nice way to get some levered returns, so what’s the stock?
Well, maybe Eric Fry has been chatting with his colleague Dan Ferris over at Stansberry (which owns Investorplace now), because the Thinkolator sez this is clearly a pitch for the Canadian natural resources-focused asset manager Sprott (SII). Ferris has been pitching Sprott as a levered gold play for a few years now… and it has done pretty well, particularly getting a little burst of attention as it uplisted to the New York Stock Exchange just when gold was hitting new highs last summer.
The last time I wrote about Sprott was back when it was applying for that NYSE listing last Summer and Ferris pitched it again. So what’s the best way to think about this one?
I think of Sprott as essentially a levered play on gold (and to a lesser extent, silver). That means it’s primarily in competition with other levered plays on precious metals, primarily the mining stocks and royalty companies. It’s not as operationally risk as those firms, since the majority of their assets under management are in ETFs that primarily just hold physical metals… but nor is it as levered on the upside unless they’re able to attract a lot of new dollars into their ETFs when prices rise. Which maybe they can, but that isn’t at all a certainty.
The New York listing could certainly help in the long run, particularly if we see an extended bull market for gold and silver — Toronto is the center of natural resources investing, and Sprott is a much stronger brand name north of the border, but there’s so much money sloshing around on the NYSE that almost any decent company that gets listed in the US and can get “discovered” with any kind of story that appeals to investors (and “leverage to gold or silver” counts as a story) can certainly get a lift from being included in that much larger market — especially if they’re a fairly unique story.
Sprott is the only real “pure play” asset manager in precious metals, so there’s certainly some chance the stock could take off if people are excited about gold — I imagine there’s a limit to that, but I don’t know what the limit is.
The optimistic case is that a NY listing lets Sprott also raise more capital at a higher valuation, and invest more heavily in the business to acquire more assets, and that creates a flywheel of returns because of the inherent efficiencies of scale that an asset management company enjoys as it grows (the same team can manage $500 million or $5 billion without a big difference in costs, especially if it’s mostly just in bullion). That’s certainly possible, though I don’t know what their plans are — if gold is on a strong rise for a few years that would provide a nice tailwind, and if gold falls again it’s possible that they’ll be able to acquire more assets, like the Tocqueville mutual fund they bought a couple years ago, at relatively appealing prices.
And in the short term, if silver really takes off because of this newfound Reddit-linked enthusiasm or for whatever other reason, the hope is that they’ll be able to boost their assets under management further as they can argue that buying their ETFs is more efficient than buying coins (which are temporarily at a stiff premium and in relatively short supply).
The pessimistic case is that they’re competing against much larger organizations for investor and institutional funds, and they might lose that competition. Particularly in the ETF world, they have had trouble attracting new funds to their mining ETFs or th