Chasing performance

In the early years of this century one Canadian fund company, Sprott Asset Management, had incredibly strong performance for several years in a row in its flagship fund and then topped the short and long-term mutual fund performance charts.  The company then was able to advertise this amazing performance, attracted many new investors, grew its assets under management and the shares of the company itself then became publicly traded, making the company founder Eric Sprott a billionaire.  The business school here at Carleton University was re-named the Sprott School of business following a very generous donation by Mr. Sprott.  This is a Canadian business success story.

As a financial adviser who focuses on behavioral investment counseling I wondered how an investment in the Sprott Canadian Equity fund has worked out for the average investor. The fund started in September 1997 and so is over 17 years old.  Performance since inception is over 10% compounded, which is an excellent rate of return, especially since the period since 1997 included two of the largest broad equity market declines in history – the period of 2000-2002 following what is now known as the technology bubble and the period of 2007-2009 now known as the “financial crisis”.  A chart of the fund since inception is shown below.

Source: Globefund.com

We know from many published studies of investor behavior that there is a powerful tendency for money to be invested after periods of recent high performance and to be withdrawn following periods of negative returns.  This is the classic “buy high, sell low” that is so detrimental to successful investing.  Consider the chart below that shows performance over the last ten years and also shows the Globe Global Equity Peer Index as contrasting data for discussion.

Source: Globefund.com

Given the Sprott Canadian Equity fund’s high performance in the years 1997 to 2007, it is likely it attracted many new investors. Since 2007 the fund has seen a decline of about 50%, a rebound of over 120% and a decline of over 50%.  This is extremely volatile for any mutual fund and reflects the fund manager’s historical investment focus on companies in the precious metals and resource area.

In a future posting I will examine how investors treated the Sprott Canadian Equity Fund and whether or not the fund has generated positive dollar returns for investors.