The mutual fund industry is chockful of modest suits with modest goals pitching modest stocks with modest prospects. It's all fairly mundane.

That's why Eric Sprott stands out in the crowd of fund managers, like one of those strikingly colourful characters set against a black-and-white backdrop in that Pleasantville movie.

Sprott, the chief executive and portfolio manager of Sprott Asset Management, doesn't play for the tie. He wants to run up the score. Shoot out the lights.

And the record shows he has done just that, consistently waxing Bay Street.

Ken Kerr, Business Edge
Eric Sprott keeps a birds'-eye view of all the action on the Sprott Asset Management trading floor.

Since the early 1980s, Sprott's funds boast annual returns in the 25-per-cent range. In the past five years, according to Bloomberg data through November, the Sprott Canadian Equity Fund had an astonishing five-year annual return of 42 per cent to rank as the top mutual fund in North America. The other 23,000 mutual funds on the continent had a pathetic average return of 3.4 per cent.

As a fund manager, Sprott doesn't travel in packs. Renowned for his gutsy calls on market trends, Sprott was loading up on gold stocks in 2000 when other fund managers, like deer caught in the headlights, were still mesmerized by technology stocks. Last year, he recognized the uranium and coal stories before they became the investing stories of the year.

These days, Eric Sprott, whose firm manages six mutual funds including three hedge funds, is in the bear camp, calling for a recession that could wreak havoc upon the financial markets.

The bulls are having none of it. Indeed, it's lonely at the top.

1. Are you from an entrepreneurial family that invested well?

"My family would be described as middle class. Nobody made any great amounts of money. My dad worked for the government. I didn't start with the silver spoon in my mouth."

2. How did you come to work at Merrill Lynch Canada after graduating from university?

"One of my first jobs was with IBM, which was a great place to be because I did some programming. That job actually gave me a bit of an in to get into the investment business, because Merrill Lynch was looking for a computer programmer and someone interested in the investment business in the same package. The first stock I bought was a penny mine. I probably invested all of about a hundred bucks on it. It was just a whim at the time and I don't think I really lost or made any money on it."

3. Where were you on Black Monday (the last market crash on Oct. 19, 1987)?

"I distinctly remember where I was. I was looking at the screen in front of me (at Sprott Securities, his former firm) and I couldn't believe what a violent reaction I was seeing in the market. On Tuesday morning on the 20th at about 10:30, I told my assistant, 'If these quotes stay right where they are right now today, we're broke.' There were no bids. There was a stock that was at $15 the Friday before the crash and on Tuesday morning the bid was $5. Finally, that stock went up to $6, then $7, and by the end of the day it might have been at $11 or $12. I always imagine that it can happen again and, in fact, I try to plan for it in a way."

4. What did you learn from that experience?

"You learn to be defensive at appropriate times. When we hit the top in the market in 2000 and saw the bull market go crazy, I knew I had to have the defensive team (defensive- oriented equities) on the field. And it worked in 2000, it worked in 2001 and it worked in 2002. It did not work in 2003. In 2004, we probably had the defence and offence on the field at the same time. We've always been very defensive since we migrated into what we think is still a secular bull market. We've got lots of defence on the field right now."

5. Why did you sell your interest in 2000 in Sprott Securities to focus your career on the fund business with Sprott Asset Management?

"We had invested people's money quite successfully and the business of running the asset management side was growing. So I thought the real success in life was picking stocks as opposed to selling them to people and trading them for people. Once Sprott Securities got to a certain size, I realized I could easily move over to this business. I would say that if there's one thing that I feel reasonably good about is that we've been quite successful as stock pickers."

6. The returns on your funds have been quite spectacular in recent years. What's your secret?

"Ah, the secret. I would guess that it would be making investments where the return can be quite superior. What I mean by superior is a situation where the stock could go up 100 per cent or 200 per cent without assuming a lot of risk. Most people would assume it's a lot of risk. But when you have a view of where certain things are going with a company, you realize there isn't a lot of risk. In '04, we bought a number of Canadian coal companies. At the time, people were saying it was totally ridiculous to buy coal companies. Then, it ends up being the story of the year, right? And the stocks are all up about 500 per cent. You could feel kind of stupid buying some coal stock at 50 cents a share that is not even in production (Pine Valley Mining (TSXV:PVM), which gained 3,400 per cent in '04). But, sure enough, nine months later it's in production and the stock's at $7."

7. A lot of people get in trouble investing by allowing emotion to drive their decision-making. How do you keep your emotions in check?

"I think we've learned to be a little bit unemotional. We take a stand on things because we believe it and it's hard to shake us when we feel strongly about something. So, the first thing is to recognize something is going to happen. The next thing is to execute on what you believe. In the case of the coal story, we actually called a coal company and said we'd like to buy 10 per cent of their company. So you have to have that bravado of backing up your view, even when you know that we're in big trouble if we're wrong. You can't sit there and trade a stock based on whatever the whims of the market are at the time."

8. What are the keys to successful investing for you?

"You have to spot the changes in the market and recognize how large it can get. In the case of Pine Valley, we're buying a stock that has at least doubled already. A lot of people say, 'We're not going there because it's gone up too much already.' So you have to have a view that is pretty well founded and realize how big it can get."

9. Who's the investor you most admire?

"It was probably Peter Lynch (one-time superstar manager of Fidelity Magellan Fund in the U.S.), only because he owned a lot of securities (within a fund) and he was always going after what he would call 10-baggers (stocks that go up in 100- per-cent multiples). We also own a lot of securities (within a fund) and we own lots of multi-baggers that drive your portfolio. It's the stock that goes up by 500 per cent that gives you the performance and it becomes a big part of your portfolio."

10. How much money do you personally have invested outside the Sprott funds?

"It wouldn't be a lot. I have hardly any investments outside of my funds. The only thing I have invested outside of the fund is my investment in gold bullion. I invest very little and less all the time in stocks individually because it's a conflict with the portfolio managers. Of my net worth, I probably have 60 per cent of my money in our funds, some in real estate and a whole bunch in gold."

11. Why are you forecasting a recession this year?

"The U.S. government is running huge deficits and using almost every method they can to stimulate the economy, such as tax cuts, child tax credits and low interest rates. And then they introduce medicare plans that they obviously can't fund. You realize that there's got to be a price to pay for all of that and that the good things that happened in '02, '03 and '04 might very well be borrowing from '05, '06 and '07. You've got to pay the piper some day. When you look at the situation the U.S. has found itself in, nobody can be envious of that. It's a tough, tough situation where there are tremendous trade deficits, tremendous budget deficits and tremendous unfunded liabilities. Even the U.S. government, in a recent document, pointed out that on an accounting basis, the liabilities of the U.S. government last year alone went up by over $10 trillion. Yes, $10 trillion! They have pension and medical obligations that are totally unfunded but they've made the promise. There's no way on this earth that they can keep their promises. And some day the citizenry of the U.S. is going to realize it. At least Canada has some money set aside for their pension plan. The U.S. has nothing."

12. What's the worst-case scenario for the stock market in the event of a recession?

"Obviously, there could be a lot of downside. It wouldn't be surprising to see the markets go down 40 per cent. We've already seen Nasdaq (index), at one point, go down 75 per cent in a very short time. When things go bad, they just stay bad. One of the problems is if U.S. interest rates go up. A logical person would have to ask, 'Why do people keep buying 10-year U.S. bonds that yield four per cent in the world's weakest currency?' Why are they happy to do that? It's a little surprising. Maybe some day those people who have been supporting that bond don't support it anymore and rates go up. And, heaven forbid, if rates go up ..."

13. How is Sprott positioning itself in the event of a deep bear market?

"In the first phase of the bear market, our Canadian equity fund did very well. What's interesting is that over the past four years I've never recommended that anyone buy our Canadian equity fund because I keep worrying about a market meltdown. I keep thinking that, in a market meltdown, How are we possibly going to make money when we have long positions on stocks? That's a real rarity and oddity. We were lucky in '00, '01 and '02 because we were in things like gold stocks that did incredibly well. So I still think that if we have a market decline now, gold and gold shares will do well. So we are very well invested in those areas and we've probably had 20 per cent cash in the (Canadian equity fund) for the last five years. Hopefully, the cash will hold its own, hopefully the gold and gold shares will go up and then we hope we can do a little better than the market on the other stocks with some stock- picking prowess. In a bad decline, I'd love to be able to say we broke even when the market is down 30 per cent or whatever. There's a knee-jerk reaction to buy gold when there's a financial calamity happening. It's historically been proven that gold outperforms the market in bear markets."

14. What's the hot investing theme of the next five years?

"Well, I'm hoping it's going to be energy as it was in '04. Imagine if China does exactly what Japan once did in terms of the well-being of the individual citizens in becoming a dominant force in the world. That could happen in the next 10 years. Their demand for physical products is going to be unending. Those countries that are expanding quickly are very aware of their energy needs and that's why they're all out trying to strike deals with various countries and companies."

15. What's your outlook for oil prices?

"I think oil prices will go up from here. It seems obvious to me that OPEC (Organization of the Petroleum Exporting Countries) has actually put a line in the sand at $40 US. It takes very little to upset the supply and demand balance in energy. When some platform in the North Sea goes out of production for 100,000 barrels, it's meaningful now. Any little problem quickly impacts prices. And then you've got the geopolitical problems and you can almost predict something like that is going to happen. Furthermore, somebody could specifically try to move the price up. OPEC could cause the oil price to go up, Russia could cause the price to go up or even Iran or Venezuela could cause the price to go up. We think $100 (per barrel) is possible at some point. We're not saying it's going there but it could."

16. What about gold?

"The one thing that has attracted me to gold is that every year we produce about 2,500 tonnes of gold in the world and the world consumes 4,000 tonnes and the difference of 1,500 has been made up of central banks' selling. And I can predict with great certainty that some day they (central banks) will run out of gold. There are a lot of people who argue that the central banks don't own that much gold anymore and I would be in that camp. What if the central banks stop selling? Then, you'd have a 1,500-tonne-a-year shortage. The price could go anywhere in that event."

17. You've been ahead of the game on commodities such as gold, uranium and coal. So what's the next commodity to explode?

"There's nothing I've identified. I'm almost embarrassed to say that I have nothing new right now. I still like the energy, coal and uranium stories. Sometimes, when you get a theme working, it could carry on for a long time. For example, I could have said in 1982 that stocks would go up for almost 20 years and that would've been a great story. Maybe we'll have a secular bear market that lasts 10 or 15 years. Our guess is that it will be a long secular bear market."

18. How many hours a week do you need to work to stay atop the market and the mutual fund standings?

"A typical day is a 12-hour day. I also work weekends. And when I take vacations, I have my computer and I'm always in touch with the market. Because now with technology you can stay totally abreast of everything, I don't really have a holiday anymore. There isn't a day that I'm not checking things out."

19. How have you fared in investing time in your personal life?

"I'm in a bear market I guess (laughing). I have a good life. I enjoy the job I have. I get great satisfaction out of accomplishing what we've accomplished. I feel pretty proud of what we've accomplished for our clients. I'd say the crowning point for me is the commitment I made to Carleton University in 1997 where I donated $5 million (to the Eric Sprott School of Business). I started up a bursary foundation with that donation and, as of Dec. 31, that investment (which he manages) exceeded $100 million in value. I feel pretty good about that. It has helped a lot of people."

20. How has money changed you and your lifestyle?

"It would be almost ridiculous to say no, right? How can you say no? I work harder than I've ever worked. That's part of the answer. I guess I get a lot more liberty in life, being able to do almost what I want. But I'm not contemplating retirement or slowing down. A guy like Sir John Templeton (renowned investor) is 90 and still active in the investment business. So I'll probably always be active in the investment business.”

IN PROFILE: ERIC SPROTT

* Title: Owner/Chairman/CEO/ Portfolio Manager, Sprott Asset Management.

* Born/Raised/Age: Ottawa; 60.

* Education: Carleton University, bachelor of commerce; chartered accountant designation.

* Family: Wife Vizma, two children.

* Career: Sprott has spent 37 years in the investment industry, beginning in 1968 with Merrill Lynch Canada where he was a research analyst.

He founded Sprott Securities in 1980 and was CEO and chief investment officer until 2000 when he sold the company to employees to focus on the money management side of the business with Sprott Asset Management.

* Favourite Stocks: Delta Petroleum (Nasdaq:DPTR), MacArthur Coal (Australian Stock Exchange:MCC). Both stocks are held in Sprott funds.

* Passions: Golf, casino gambling.

THE COMPANY: SPROTT ASSET MANAGEMENT

* Brass: Eric Sprott, CEO; John Embry, chief investment strategist; Neal Nenadovic, chief financial officer.

* Profile: Sprott Asset Management is a fund company that manages about $2 billion in assets. Formerly a division of Sprott Securities, Sprott Asset Management was spun off as an independent operation in 2000.

* Funds: Sprott Asset Management manages six funds - Canadian Equity Fund, Gold & Precious Minerals Fund, Energy Fund, Hedge Fund, Bull/Bear RSP Fund (hedge fund) and Opportunities Hedge Fund.

* Stat: The Sprott Canadian Equity Fund had a five-year annualized return of 42 per cent through last November and, according to Bloomberg data, it was the best performing fund in North America.

* Website: www.sprott.com.

* Head Office: Royal Bank Plaza, South Tower, 200 Bay St., Suite 2700 (PO Box 27), Toronto, Ont.,M5J 2J1.

* Phone/Fax: 416-943-6707, 866-299-9906 (toll free)/416-362-4928.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)