Sprott Energy Fund 3MAR SPROTT ASSET MANAGEMENT LP ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE

Transcription

1 Sprott Energy Fund SPROTT ASSET MANAGEMENT LP ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE 2011 The annual management report of fund performance is an analysis and explanation that is designed to complement and supplement an investment fund s financial statements. This report contains financial highlights but does not contain the complete annual financial statements of the investment fund. You can get a copy of the annual financial statements at your request, and at no cost, by calling , by visiting our website at or 3MAR SEDAR at or by writing to us at: Sprott Asset Management LP, Royal Bank Plaza, South Tower, 200 Bay Street, Suite 2700, P.O. Box 27, Toronto, Ontario M5J 2J1. Securityholders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure.

2 Management Discussion of Fund Performance * Investment Objective and Strategies The objective of the Sprott Energy Fund (the Fund ) is to achieve long-term capital growth. The Fund invests primarily in equity and equity related securities of companies that are involved directly or indirectly in the exploration, development, production and distribution of oil, gas, coal, uranium and other related activities in the energy and resource sector. The Fund may follow a more concentrated investment approach and from time to time overweight certain sub-sectors within the energy and resource sector, when deemed appropriate by the Portfolio Adviser. This may result in the Fund s portfolio weighting being substantially different from the weightings of the S&P/TSX Capped Energy Total Return Index (the Index ). As part of its investment strategy, the Fund may: engage in short selling up to 20% of the Fund s total net assets as a result of special relief it obtained from Canadian securities regulators; and invest in and overweight cash and fixed income securities based on the market outlook for the energy sector. Risks The risks of investing in the Fund are described in the Fund s simplified prospectus. This Fund is suitable only for investors seeking long-term capital growth with a high tolerance for risk and volatility. Investors should be comfortable with high investment risks and have a long-term investment horizon. Results of Operations The Fund Series A declined 11.0% during fiscal 2011 surpassing its benchmark S&P/TSX Capped Energy Total Return Index s 14.8% loss during the same period. The Fund started the year with a gross short position of 9.0%. WTI oil rose more than $30 USD from mid-february to the end of April and by the end of the first quarter the Fund had eliminated its short positions. The price of oil was weak during the second quarter, due to the fear of demand destruction coupled with the almost unprecedented release from the collective world s strategic petroleum reserves. Natural gas was essentially flat as persistent production growth was soaked up by exceptionally strong cooling demand from hot weather in both Canada and the United States. Our Fund is skewed towards smaller cap names which experienced a hard sell-off during this period. Despite the year being the first time in history when the world oil price averaged over $100 a barrel, oil stocks languished, falling by over 30% in some cases. Capital markets fell prey to fear surrounding European banking challenges, the potential for a slowdown in Chinese growth and a plethora of other real and perceived issues. For the first time in several years, the Fund had a substantial weighting towards service stocks. Trican, Calfrac, and Precision Drilling made up an approximate 22% weighting at the end of the year. Service stocks are trading at historically low levels in some cases a full 300 basis point discount on a EV/EBITDA basis relative to their 5 year historical mid-point averages. We believe that a strong oil price, continued drilling in liquid rich natural gas reservoirs, and impending drilling in Canada s western provinces will create continued tightness in services, especially for frackers. We believe that as investors become more accepting that exploration and production spending will likely be up between 5% to 10% during 2012 and that tightness will extend into 2013, service stocks will experience a multiple expansion. The Fund s net asset value decreased by 3.4% during the year, from $136.5 million on December 31, 2010, to $131.9 million on December 31, This change was predominantly due to net purchases of units of $14.8 million, offset by realized capital gains of $10.9 million, unrealized investment losses of $23.2 million and a net investment loss of $4.1 million. The management expense ratio was largely unchanged from the prior year, while the portfolio turnover ratio increased as a result of increased trading activity in the Fund s portfolio. * In this report, net asset value ( NAV ) refers to the value of the Fund as calculated for transaction purposes, whereas net assets is used for financial statement purposes.

3 Recent Developments FUTURE ACCOUNTING STANDARDS In December 2011, the Canadian Accounting Standards Board confirmed that the use of International Financial Reporting Standards ( IFRS ) will be required commencing January 1, 2014 for investment funds. The Manager plans to defer the adoption of IFRS until this time for the Funds. The Manager has developed an IFRS changeover plan and has identified key issues and likely impacts resulting from the adoption of IFRS. Based on management s current evaluation of the differences between Canadian GAAP and IFRS, the adoption of IFRS is not expected to have a significant impact on the calculation of net assets per unit as the Funds assets are currently stated at fair value which is consistent with the requirements under IFRS. IFRS is expected to affect the overall presentation of financial statements and additional disclosure in the notes to financial statements will be required. The Manager will continue to monitor new standards and amendments to existing IFRS standards and evaluate their impact on the Funds. Related Party Transactions MANAGEMENT FEES The Fund pays a management fee to the Manager, at an annual rate of 2.5% for Series A units, 1.5% for Series F units and as negotiated by the unitholders of Series I. The management fee is calculated and accrued daily based on daily net asset value of that series of the Fund, and is paid monthly. For the year ended December 31, 2011, the Fund incurred management fees of $3,640,305 (including taxes). The breakdown of the services received in consideration of the management fees, as a percentage of management fees, is as follows: Portfolio Trailing Advisory Commissions Sprott Energy Fund Series A 61% 39% Sprott Energy Fund Series F 100% Sprott Energy Fund Series I 100% Out of the management fees that the Manager received from the Fund, the Manager paid trailer commissions of $298,283 during the year ended December 31, 2011 to Sprott Private Wealth LP, an affiliate of the Manager. INCENTIVE FEES The Fund also pays its Portfolio Adviser, Sprott Asset Management LP, an annual incentive fee, equal to a percentage of the average net asset value of the applicable Series of the Fund. Such percentage will be equal to 10% of the difference by which the return in net asset value per unit of the applicable Series from January 1 to December 31 exceeds the percentage return of the S&P/TSX Capped Energy Total Return Index for the same period. If the performance of a Series of the Fund in any year is less than the performance of the Index (the Deficiency ), then no incentive fee will be payable until the performance of the applicable Series, on a cumulative basis, has exceeded the amount of the Deficiency. For year ended December 31, 2011, the Fund did not incur any incentive fees. OPERATING EXPENSES The Fund pays its own operating expenses, which include, but are not limited to, audit, legal, custodial, trustee, filing and administrative expenses as well as unitholder reporting costs. The Manager pays certain of these expenses on behalf of the Fund and then is reimbursed by the Fund.

4 Financial Highlights The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the past five years Series A $ $ $ $ $ Net assets, beginning of period Increase (decrease) from operations: Total revenue Total expenses (1.05) (0.83) (0.37) (0.68) (0.69) Realized gains (losses) for the period 1.41 (0.10) (1.83) (1.73) 2.68 Unrealized gains (losses) for the period (2.91) (13.57) 1.26 Total increase (decrease) from operations 2 (2.50) (15.93) 3.41 Distributions: From income (excluding dividends) From dividends From capital gains Return of capital Total annual distributions Net assets, end of period Series F $ $ $ $ $ Net assets, beginning of period Increase (decrease) from operations: Total revenue Total expenses (0.70) (0.58) (0.25) (0.44) (0.44) Realized gains (losses) for the period 1.36 (0.09) (1.97) (1.65) 2.53 Unrealized gains (losses) for the period (3.02) (24.79) 1.31 Total increase (decrease) from operations 2 (2.31) (26.83) 3.56 Distributions: From income (excluding dividends) From dividends From capital gains Return of capital Total annual distributions Net assets, end of period

5 The Fund s Net Assets per Unit 1 continued Series I $ $ $ $ $ Net assets, beginning of period Increase (decrease) from operations: Total revenue Total expenses (0.39) (0.65) (0.28) (0.48) (0.48) Realized gains (losses) for the period 1.21 (0.09) (2.06) (2.40) 4.69 Unrealized gains (losses) for the period (3.46) (14.12) (5.16) Total increase (decrease) from operations 2 (2.58) (16.95) (0.71) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital Total annual distributions Net assets, end of period This information is derived from the Fund s audited annual financial statements. The net assets per unit presented in the financial statements differs from the net asset value calculated for fund pricing purposes. An explanation of these differences can be found in the notes to the financial statements. 2 The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. Net assets and distributions are based on the actual number of units outstanding at the relevant time. This table is not intended to be a reconciliation of beginning to ending net assets per unit.

6 Ratios and Supplemental Data Series A Total net asset value (000s) 1 $98,984 $103,437 $87,353 $48,681 $167,738 Number of units outstanding 1 5,626,721 5,235,929 5,865,284 5,755,196 7,041,677 Management expense ratio % 3.13% 3.11% 2.85% 2.86% Trading expense ratio % 1.78% 0.31% 0.26% 0.28% Portfolio turnover rate % % 30.83% 56.21% 55.40% Net asset value per unit 1 $17.59 $19.76 $14.89 $8.46 $23.82 Series F Total net asset value (000s) 1 $25,032 $25,426 $19,275 $12,054 $33,697 Number of units outstanding 1 1,352,363 1,236,570 1,256,718 1,397,135 1,401,540 Management expense ratio % 2.07% 2.06% 1.79% 1.79% Trading expense ratio % 1.78% 0.31% 0.26% 0.28% Portfolio turnover rate % % 30.83% 56.21% 55.40% Net asset value per unit 1 $18.51 $20.56 $15.34 $8.63 $24.04 Series I Total net asset value (000s) 1 $7,885 $7,681 $5,140 $2,890 $8,090 Number of units outstanding 1 381, , , , ,388 Management expense ratio % 2.10% 2.06% 1.81% 1.79% Trading expense ratio % 1.78% 0.31% 0.26% 0.28% Portfolio turnover rate % % 30.83% 56.21% 55.40% Net asset value per unit 1 $20.67 $22.64 $16.89 $9.49 $ The information is provided as at December 31 of the years shown. 2 Management expense ratio ( MER ) is based on total expenses (including incentive fees, if any; excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. 3 The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. The TER includes dividend expense and securities borrowing expense paid by the Fund in connection with securities sold short. 4 The Fund s portfolio turnover rate indicates how actively the Fund s portfolio adviser trades its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher the Fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the Fund.

7 Past Performance The indicated rates of return are the historical total returns including changes in unit values and assume reinvestment of all distributions in additional units of the relevant Series of the Fund. These returns do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that may reduce returns. Please note that past performance is not indicative of future performance. All rates of returns are calculated based on the Net Asset Value of the particular Series of the Fund. Year-by-Year Returns The following chart indicates the annual performance of each Series of the Fund for the years shown. The chart shows, in percentage terms, how much an investment made on the first day of each period would have grown or decreased by the last day of each period. 100% 80% 60% 40% 20% 0% -20% -40% % -80% Year 2004* Ser ies A Ser ies F Ser ies I 28FEB * Return from April 15, 2004 to December 31, 2004 (not annualized).

8 Long and Short Portfolio Returns The following allocates the returns of the Fund between the long portfolio and the short portfolio for the years shown. 40% % RETURN 0% % -40% 2010* 2011 Long Po r tfolio Shor t Po r tfolio 28FEB * Return from January 29, 2010 to December 31, 2010 (not annualized); the Fund did not hold short portfolio positions prior to January 29, Annual Compound Returns The following table illustrates the annual compound total return for each Series of units of the Fund for the periods shown. As a basis of performance comparison, the annual compound return of the Fund is compared to that of the S&P/TSX Capped Energy Total Return Index (the Index ). The Index is comprised of securities of Canadian energy sector issuers listed on the TSX. Since the Fund does not necessarily invest in the same securities or in the same proportion as the Index, the performance of the Fund is not expected to equal the performance of the Index. Since 1-Year 3-Year 5-Year Inception* Sprott Energy Fund Series A 10.95% 27.64% 2.73% 8.95% Sprott Energy Fund Series F 9.98% 28.97% 1.73% 10.04% Sprott Energy Fund Series I 8.69% 29.60% 1.44% 10.33% S&P/TSX Capped Energy Total Return Index 14.80% 10.44% 0.77% 8.68% Long portfolio Short portfolio 10.19% 0.41% * Since launch date of April 15, 2004 for Series A, F and I.

9 Summary of Investment Portfolio As at December 31, 2011 Portfolio Allocation Top 25 Long Positions % of % of Net Asset Value Issuer Net Asset Value Long Positions Trican Well Service Ltd. 8.3 Oil and Gas 98.8 Calfrac Well Services Ltd. 8.1 Other 0.0 Legacy Oil & Gas, Inc. 7.9 Total Long Positions 98.8 Suncor Energy, Inc. 6.1 Precision Drilling Corp. 6.0 Cash 1.3 Painted Pony Petroleum Ltd. Class A 5.9 Other Net Liabilities (0.1) Pinecrest Energy, Inc. 5.4 Total Net Asset Value Southern Pacific Resource Co. 4.7 Crescent Point Energy Trust 4.4 Arcan Resources Ltd. 4.3 Renegade Petroleum Ltd. 4.2 Delphi Energy Corp. 3.9 Crocotta Energy, Inc. 3.3 Trilogy Energy Corp. 2.8 Celtic Exploration Ltd. 2.6 Yoho Resources, Inc. 2.5 Spartan Oil Corp. 2.1 Tourmaline Oil Corp. 2.0 Novus Energy, Inc. 1.8 Westfire Energy Ltd. 1.7 Advantage Oil & Gas Ltd. 1.7 Border Petroleum Corp. 1.6 TriOil Resources Ltd. 1.5 Cash & Cash Equivalents 1.3 Whitecap Resources, Inc. 1.3 Top 25 long positions as a percentage of net asset value 95.4 The Fund held no short positions as at December 31, This summary of investment portfolio may change due to the ongoing portfolio transactions of the Fund. Quarterly updates of the Fund s investment portfolio are available on the Internet at

10 Corporate Information Corporate Address Sprott Asset Management LP Royal Bank Plaza, South Tower 200 Bay Street, Suite 2700, P.O. Box 27 Toronto, Ontario M5J 2J1 T TOLL-FREE F E invest@sprott.com For additional information visit our website: Call our mutual fund information line for daily closing prices: or Auditors Ernst & Young LLP Ernst & Young Tower P.O. Box 251, 222 Bay Street Toronto-Dominion Centre Toronto, Ontario M5K 1J7 Legal Counsel Borden Ladner Gervais LLP Scotia Plaza 40 King Street West Toronto, Ontario M5H 3Y4