DEAR FELLOW SHAREHOLDERS,

We are pleased to report that Sprott Focus Trust (FUND) posted strong performance in the first half of 2021. For the six months ended June 30, 2021, FUND’s net asset value (NAV) advanced 19.25% and its market price increased 26.62%, reflecting the reinvestment of dividends. This compares favorably to FUND’s benchmark, the broad-based Russell 3000 Total Return Index, which gained 15.11% in the first six months. For the trailing 12 months ended June 30, 2021, FUND’s NAV and market price appreciated by 45.85% and 55.33%, respectively, compared to the Russell 3000 Total Return Index’s 44.16% advance. While Sprott Focus Trust still trails on some longer-term measures, we are optimistic about improvement ahead.

The underpinnings of FUND’s first-half success are the long awaited return of active investing and a shift in preference to undervalued, economically sensitive companies. During 2020’s COVID-induced economic shutdown, a new audience discovered stock market investing. Armed with new savings and easily accessible cheap (or commission-free) trading platforms, a new breed of retail investors discovered stocks for the first time. This new class of investors seems disinterested in passively betting on indices or ETFs and has found new non-traditional Wall Street research sources. They seem to prefer to find their gurus on social media platforms. While their initial targets were heavily shorted stocks like GameStop Corp. (yes, we did once own it and sold it near the bottom), their interest seems to have broadened out to seek other fundamental factors. As the first half of 2021 progressed, small-cap stocks with higher quality metrics and more compelling valuations were discovered by these more active and engaged investors.

We entered a corrective phase in the second quarter (which persists at this writing) due to fears that the Delta variant of COVID-19 might slow the rapid economic recovery. We expect the correction in value and small-cap strategies will be short lived. The markets are taking their cues from the U.S. Treasury bond market, and it seems that the massive risk-off rally in bond prices has run its course. Further, given the level of interest rate manipulation by the Federal Reserve (“Fed”), we would not trust the historically reliable signals delivered by bond yields. It also seems likely that more fiscal stimulus is on its way and its inflationary impacts will be far from “transitory.” The reversal of relative performance between value and growth styles was the most dramatic we have seen since 2000 and we believe the powerful mean reversion in our favor is just beginning.

With its heavy emphasis on quality balance sheets and high returns on capital, FUND’s portfolio was well positioned when the markets

turned their attention toward economic recovery with the arrival of COVID vaccines at the end of last year. Our overweighting in hard assets themes like Energy Services, Industrials, Materials and Real Estate was finally rewarded. Many of FUND’s portfolio companies posted all-time record results in the first quarter of 2021. The early read for the second quarter is more of the same, with even brighter prospects for the balance of 2021. We are enjoying intelligent share buyback activity and dividend increases among most of our portfolio holdings. Our heavy exposure to asset management companies positions us well for the continued asset appreciation in markets (good inflation). Finally, during the 2020 COVID recession, many companies found new ways to improve their business models and are now enjoying record operating margins. The current domestic competitive landscape looks more like the 2000-2010 period than the last decade (2011-2020) which was characterized by disinflation. We have remained fully invested and our holdings, while up, are barely keeping pace with their improving fundamentals.

Portfolio Activity

The S&P 500 Total Return Index advanced 96.14% from the March 23, 2020, low last year in an almost straight-line fashion through June 30, 2021. Following a move of this magnitude over such a short time period, we’ve been better sellers than buyers of late, reflected in our lower-than-normal portfolio turnover of 9.11%. We exited four positions during the six months while building only one new position (and started to nibble on another). Positions in Arcosa, Inc. Cirrus Logic, Inc. and Gentex Corporation were liquidated during the period under review after very significant share price moves in each and reaching our estimates of fair value. Fresnillo plc, part of the precious metals basket, was liquidated in favor of consolidating exposure to silver with our higher conviction position in Hochschild Mining plc.

A new position in Australian drilling services company DDH1 Limited (“DDH1”). was initiated during the first half of 2021. Shares in DDH1 languished for a short time following its March 2021 IPO (initial public offering), providing the opportunity to buy a very high-quality business at an even better entry price. DDH1 Drilling started in 2006 with a single diamond core drill rig. Through consistent organic growth and two key acquisitions in 2018 and 2019, DDH1 has grown to become one of Australia’s largest providers of specialized and more technically challenging and deep drilling services. The company’s market share in Australia has grown from 2% (16 rigs) in 2011 to 11% (99 rigs) as of December 31, 2020, a compound average growth rate of 20%. Key elements of attraction that enable DDH1’s resilience through the mining cycle include a focus on large scale low-cost miners with an ongoing need to replenish reserve depletion

 

regardless of the stage in the cycle; a focus on producing mines and near mine development; excellent track record managing fixed and variable costs; judicious use of leverage to ensure sufficient capital to grow in the down cycle instead of servicing debt (DDH1 has a net cash balance sheet today); exploration exposure targeting higher-margin work; diversity in commodity exposure, and sufficient scale in each; specialization requiring greater skills, garnering higher day rates; a focus on increasingly deeper drilling industry trends — drilling rates per meter increase as depth increases.

During the first half of 2021, we also started to nibble on shares in leading scrap steel producer Nucor Corporation before record high steel prices during the period propelled shares beyond our targeted buy range. We remain disciplined and patient, hoping for a better entry price in the second half of 2021.

Performance Contributors and Detractors

In our last letter to shareholders (annual report dated December 31, 2020), we explained that in the closing days of 2020, Sprott Focus Trust participated in a faltering SPAC (special purpose acquisition company) transaction involving AerSale Corporation, a global leader in aviation aftermarket products and services. It was an opportunistic purchase since very attractive terms were needed to entice outside investor participation and enable the deal with Monocle Acquisition Corporation to be consummated. Since the closing of the transaction, AerSale shares advanced strongly, producing the greatest source of portfolio performance during the period under review (3.10% contribution). Shares in high-quality denim retailer The Buckle, Inc. contributed 2.67% of portfolio performance thus far this year as consumers returned to in-store shopping while online sales activity remained elevated, driving better than expected operating results. Biogen Inc. delivered strong share price performance during the period as the FDA approved its controversial Alzheimer’s drug aducanumab. Shares surged 41.42% through June 30, 2021, contributing 1.82% of total portfolio performance. Shares in Helmerich & Payne, Inc., the largest U.S. oil and gas drilling services company, contributed 1.80% of total performance as drill rig utilization rates continue to rebound from the deep 2020 trough. Helmerich & Payne’s transition to performance-based contracts from standard day rate-based contracts should drive increased profit margins as the energy drilling upcycle continues. Western Digital Corporation shares contributed 1.27% of portfolio performance during the period as expectations for improved end-market demand for the company’s hard disk drive (HDD) and NAND memory products suggest better pricing and stronger profitability in the coming quarters and beyond.

The greatest detractors from Sprott Focus Trust’s performance during the first half of 2021 were all miners in the precious metals basket.

The spot price of gold declined 6.76% in the first six months of this year on the belief that the Fed will raise interest rates sooner than later to tame what is believed to be transient inflationary pressures related to the reopening of the post-COVID global economy. Against this pricing headwind, shares of precious metals producers across the globe struggled, despite strong underlying fundamentals at the current cyclically depressed spot prices. The bottom five portfolio positions in aggregate detracted 1.69% from FUND’s total portfolio performance. (This compares favorably, however, to the aggregate contribution of 10.66% from the top five performers discussed earlier.) Today, precious metals mining equities offer generally clean balance sheets, strong expected free cash flow and among the most compelling valuations in 20 years, which translates into tremendous perceived risk-reward opportunities. Great investment opportunities are often preceded by significant declines. We believe this is the case today with our basket of gold and silver miners, despite the market’s recent sell-off.

 

 

Figure 1

 

 

Positioning

Sprott Focus Trust at mid-year had 35 equity positions and was nearly fully invested with cash at 2.59%. As shown in Figure 2, the Fund’s greatest sector exposure remains the Materials sector at 25.14%, consisting of both industrial and precious metals producers and drilling services companies. Almost as large, is the Fund’s exposure to the Financials sector (20.70%), consisting primarily of asset managers and longtime holding Berkshire Hathaway Inc. We still own no banks (a differentiating feature among value managers) since their levered business model provides no margin of safety against permanent impairment, a lesson others learned during the 2008 global financial crisis. Six of the previous largest ten positions remain, with AerSale Corporation, The Buckle, Inc., Pason Systems Inc. and THOR Industries, Inc. appreciating into the top Top 10 list by mid-year. Share price appreciation resulted in the portfolio becoming slightly more concentrated today than at year-end. The Top 10 comprised 46.38% of portfolio exposure versus 45.48% at year-end.

Statistically, as shown in Figure 3, the Sprott Focus Trust remains invested across a collection of equity securities of high quality

 

companies with pristine balance sheets, generating solid returns on capital and priced at a discount to our estimates of fair value. The Fund’s long term performance track record demonstrates that a portfolio of companies with these attributes can be expected to deliver attractive returns with less risk over time. As significant co-investors in the Sprott Focus Trust ourselves, we believe the Fund is very well positioned for whatever market conditions the future may hold.

Top 10 Positions

(% of Net Assets)

 

AerSale Corporation			5.84
The Buckle, Inc.			5.15
Federated Hermes, Inc.			4.80
Berkshire Hathaway Inc.			4.79
Helmerich & Payne, Inc.			4.50
Western Digital Corporation			4.39
Kennedy-Wilson Holdings, Inc.			4.33
Artisan Partners Asset Management, Inc.			4.24
Pason Systems Inc.			4.24
THOR Industries, Inc.			4.10

 

 

Portfolio Sector Breakdown

(% of Net Assets)

 

Materials			25.14
Financial Services			20.70
Energy			9.83
Consumer Discretionary			9.25
Real Estate			8.16
Consumer Staples			7.81
Industrials			7.44
Information Technology			5.95
Health Care			3.14
Cash & Cash Equivalents			2.59

Figure 2

 

 

 

Portfolio Diagnostics

 

Fund Net Assets			$275 million
Number of Holdings			35
2021 Semi-Annual Turnover Rate			9.11%
Net Asset Value			$9.38
Market Price			$8.51
Average Market Capitalization1			$3,295 million
Weighted Average P/E Ratio2,3			15.49x
Weighted Average P/B Ratio2			1.91x
Weighted Average Yield			1.94%
Weighted Average ROIC			19.03%
Weighted Average Leverage Ratio			2.06x
Holdings ³75% of Total Investments			20
U.S. Investments (% of Net Assets)			71.31%
Non-U.S. Investments (% of Net Assets)			28.69%

Figure 3

 

1

Geometric Average. This weighted calculation uses each portfolio holding’s market cap in a way designed to not skew the effect of very large or small holdings; instead, it aims to better identify the portfolio’s center, which Sprott believes offers a more accurate measure of average market cap than a simple mean or median.

2	Harmonic Average. This weighted calculation evaluates a portfolio as if it were a single stock and measures it overall. It compares the total market value of the portfolio to the portfolio’s share in the earnings or book value, as the case may be, of its underlying stocks.

3	The Fund’s P/E ratio calculation excludes companies with zero or negative earnings (12.98% of holdings as of 6/30/2021).

Outlook

Two years ago, in our semi-annual report letter to shareholders (June 30, 2019), we wrote about Ray Dalio of Bridgewater Associates, LP and his prediction of a “paradigm shift.” The observation was that with the changeover of decades, there is often a reversal of investment preferences and performance. Strategies that had previously worked for a decade surrender their leadership to the last ten years’ underperformers. We think that a paradigm shift may have occurred in 2020 with the COVID-19 pandemic and ensuring economic shutdown acting as the catalyst. The remarkable monetary and fiscal responses to the sharp but short recession may have broken us out of the disinflationary slumber that persisted for years following the great financial crisis. The low-interest rate/low-inflation environment has given way to higher inflation and negative real interest rates (adjusted for inflation) as far as we can see. We don’t think this is transitory. Labor is in short supply, at least at current wage levels. The benefits of offshoring labor to cheaper foreign jurisdictions are now viewed as societal negatives with policies designed to bring jobs back onshore. Just-in-time inventory proved costly as supply chains broke down with transportation bottlenecks. The costs of holding inventory are low and the business risks of being caught short are high. As individual consumers, we have certainly learned to keep more toilet paper and cleaning supplies in our homes. Politicians have fully embraced Modern Monetary Theory as a means to pull forward popular spending without concern for the longer-term “pay for.” We believe the sharp rallies we have seen in commodities and value stocks are at the very early stages of what could be a long bull market. For certain, there will be sharp corrections along the way. Markets are aligned and driven by rapid shifts among large algorithmic trading strategies. There will be plenty of macro headlines which will need to be digested. The national debt ceiling has been suspended for two years and needs to be addressed. Political and regulatory attacks on the largest companies are ongoing. And, the market will need to adjust for any new personal or corporate tax changes that emerge in the next six months. But it seems the “paradigm shift” is in play, and we believe that FUND’s portfolio is well positioned for the current market environment.

We would like to include a final word on FUND’s market price versus its net asset value performance. We made some very solid progress during the first half of 2021 in narrowing the discount,

 

which moved from 14.60% as of December 31, 2020, to 9.33% as of June 30, 2021. We believe that our ongoing program to repurchase shares and our relatively strong performance were contributing factors. We hope progress will continue. We can control the first factor. Since we began our share repurchase program in November of 2020, we have retired 1,339,326 shares. In the FUND’s June Board meeting, our Directors approved another 5%. We hope the market will continue to deliver the second part.

As always, we are grateful to our loyal and long-term shareholders for their support and patience. We are surrounded by excited and experienced professionals at Sprott and remain contrarian, innovative and aligned. Once again, many thanks to Matt Haynes for his contributions to our research and co-authorship of this letter. We always enjoy sharing our thoughts with fellow shareholders, so please don’t hesitate to call us directly at 203.656.2430.

Sincerely,

W. Whitney George

Senior Portfolio Manager

July 27, 2021

 

 

Average Annual Total Return (%) Through 6/30/2021

 

		YTD				1 YR				3 YR				5 YR				10 YR				15 YR				20 YR				SINCE INCEPTION (11/1/96)1
FUND (NAV)			19.25				45.85				12.58				13.00				7.85				7.24				9.42				9.96

 

*	Not Annualized.

 

 

Relative Returns: Monthly Rolling Average Annual Return Periods¹

Since inception through 6/30/2021

On a monthly rolling basis, the Fund outperformed the Russell 3000 in 56.50% of all 10-year periods; 53.16% of all 5-year periods; 46.74% of all 3-year periods and 48.42% of all 1-year periods.

 

 

*	Average of monthly rolling average annual total returns over the specified periods.

 

 

Market Price Performance History Since Inception (11/1/96)¹

Cumulative Performance of Investment²

 

Description		1 MO				QTD				YTD				1 YR				3 YR				5 YR				10 YR				15 YR				20 YR				SINCE INCEPTION
Sprott Focus Trust (MKT TR)			0.99				10.57				26.62				55.33				40.61				95.19				118.54				159.86				556.17				1,037.56
Sprott Focus Trust (MKT Price)			(0.41	)			9.04				23.26				44.15				8.76				32.48				9.18				(17.35	)			35.00				94.40

 

 

1

Royce & Associates, LLC served as investment adviser of the Fund from November 1, 1996 to March 6, 2015. After the close of business on March 6, 2015, Sprott Asset Management LP and Sprott Asset Management USA, Inc. became the investment adviser and investment sub-adviser, respectively, of the Fund.

2	Reflects the cumulative performance experience of a continuous common stockholder who reinvested all distributions and fully participated in the primary subscription of the Fund’s 2005 rights offering.

3	Reflects the actual month-end market price movement of one share as it has traded on Nasdaq.

 

Calendar Year Total Returns (%)
YEAR		FUND (NAV)
2020			6.80
2019			32.67
2018			-17.01
2017			18.46
2016			24.83
2015			-11.12
2014			0.32
2013			19.73
2012			11.42
2011			-10.51
2010			21.79
2009			53.95
2008			-42.71
2007			12.22
2006			15.85
2005			13.66
2004			29.34
2003			54.33
2002			-12.50
2001			10.04
2000			20.94
1999			8.73

 

Why should I reinvest my distributions?

By reinvesting distributions, a stockholder can maintain an undiluted investment in the Fund. The regular reinvestment of distributions has a significant impact on stockholder returns. In contrast, the stockholder who takes distributions in cash is penalized when shares are issued below net asset value to other stockholders.

How does the reinvestment of distributions from the Fund work?

The Fund automatically issues shares in payment of distributions unless you indicate otherwise. The shares are generally issued at the lower of the market price or net asset value on the valuation date.

How does this apply to registered stockholders?

If your shares are registered directly with the Fund, your distributions are automatically reinvested unless you have otherwise instructed the Fund’s transfer agent, Computershare, in writing, in which case you will receive your distribution in cash. A registered stockholder also may have the option to receive the distribution in the form of a stock certificate.

What if my shares are held by a brokerage firm or a bank?

If your shares are held by a brokerage firm, bank, or other intermediary as the stockholder of record, you should contact your brokerage firm or bank to be certain that it is automatically reinvesting distributions on your behalf. If they are unable to reinvest distributions on behalf, you should have your shares registered in your name in order to participate.

What other features are available for registered stockholders?

The Distribution Reinvestment and Cash Purchase Plan also allows registered stockholders to make optional cash purchases of shares of the Fund’s common stock directly through Computershare on a monthly basis, and to deposit certificates representing your FUND shares with Computershare for safekeeping. Plan participants are subject to a $0.75 service fee for each voluntary cash purchase under the Plans.

How does the Plan work for registered stockholders?

Computershare maintains the accounts for registered stockholders in the Plan and sends written confirmation of all transactions in the account. Shares in the account of each participant will be held by Computershare in non-certificated form in the name of the participant, and each participant will be able to vote those shares at a stockholder meeting or by proxy. A participant may also send stock certificates for FUND held by them to Computershare to be held in non-certificated form. There is no service fee charged to participants for reinvesting distributions. If a participant elects to sell shares from a Plan account, Computershare will deduct a $2.50 service fee from the sale transaction. If a nominee is the registered owner of your shares, the nominee will maintain the accounts on your behalf.

How can I get more information on the Plan?

You can call an Investor Services Representative at (203) 656-2430 or you can request a copy of the Plan for your Fund from Computershare. All correspondence (including notifications) should be directed to: Sprott Focus Trust Distribution Reinvestment and Cash Purchase Plan, c/o Computershare, PO Box 30170, College Station, TX 77842-3170, telephone (800) 426-5523 (from 9:00 A.M. to 5:00 P.M.).

 

Schedule of Investments
Common Stocks – 97.2%
		SHARES				VALUE
CONSUMER DISCRETIONARY – 9.1%
AUTOMOBILES – 4.1%
Thor Industries, Inc.1			100,000			$	11,300,000
SPECIALTY RETAIL – 5.0%
Buckle, Inc. (The)			275,000				13,681,250
Total (Cost $14,108,609)							24,981,250
CONSUMER STAPLES – 7.8%
FOOD PRODUCTS – 7.8%
Cal-Maine Foods, Inc.			265,000				9,595,650
Industrias Bachoco SAB de CV1			75,000				3,474,000
Sanderson Farms, Inc.			45,000				8,458,650
							21,528,300
Total (Cost $16,394,758)							21,528,300
ENERGY – 9.8%
ENERGY EQUIPMENT & SERVICES – 9.8%
Helmerich & Payne, Inc.			380,000				12,399,400
Pason Systems Inc.			1,620,000				11,670,378
Smart Sand, Inc.1,2			900,000				2,997,000
							27,066,778
Total (Cost $27,416,283)							27,066,778
FINANCIALS – 20.7%
CAPITAL MARKETS – 15.9%
Artisan Partners Asset Management, Inc.			230,000				11,688,600
Ashmore Group plc1			700,000				3,727,993
Federated Hermes, Inc.			390,000				13,224,900
Franklin Resources, Inc.			275,000				8,797,250
Value Partners Group Ltd.			10,000,000				6,388,213
							43,826,956
DIVERSIFIED FINANCIAL SERVICES – 4.8%
Berkshire Hathaway Inc.2			47,500				13,201,200
Total (Cost $40,703,639)							57,028,156
HEALTH CARE – 3.1%
BIOTECHNOLOGY – 3.1%
Biogen Inc.2			25,000				8,656,750
Total (Cost $5,562,855)							8,656,750
INDUSTRIALS – 7.4%
AEROSPACE & DEFENSE – 5.8%
AerSale Corporation2			1,291,400				16,090,844
MARINE – 1.6%
Clarkson plc			100,000				4,412,727
Total (Cost $13,235,666)							20,503,571
INFORMATION TECHNOLOGY – 6.0%
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS – 1.6%
Vishay Intertechnology, Inc.			190,000				4,284,500
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS – 4.4%
Western Digital Corporation2			170,000				12,098,900
Total (Cost $10,130,738)							16,383,400

Schedule of Investments
		SHARES				VALUE
MATERIALS – 25.1%
CHEMICALS – 3.7%
Westlake Chemical Corp.			115,000			$	10,360,350
METALS & MINING – 21.4%
Agnico Eagle Mines Ltd.			60,000				3,627,000
Barrick Gold Corporation			320,000				6,617,600
Centamin plc			2,000,000				2,799,799
DDH1 Limited.2			6,000,000				5,264,650
Gemfields Group Ltd.1,2			16,000,000				2,016,807
Hochschild Mining plc			2,400,000				5,092,757
Kirkland Lake Gold Ltd.1			175,000				6,742,750
Major Drilling Group International, Inc.1,2			900,000				6,222,168
Nucor Corporation			5,000				479,650
Pan American Silver Corp.			200,000				5,714,000
Reliance Steel & Aluminum Co.			60,000				9,054,000
Seabridge Gold Inc.1,2			300,000				5,265,000
							58,896,181
Total (Cost $49,071,247)							69,256,531
REAL ESTATE – 8.2%
REAL ESTATE MANAGEMENT & DEVELOPMENT – 8.2%
FRP Holdings, Inc.2			120,000				6,681,600
Kennedy-Wilson Holdings, Inc.			600,000				11,922,000
Marcus & Millichap, Inc.2			100,000				3,887,000
							22,490,600
Total (Cost $15,072,492)							22,490,600
TOTAL COMMON STOCKS
(Cost $191,696,287)							267,895,336
REPURCHASE AGREEMENT – 2.5%
Fixed Income Clearing Corporation, 0.0% dated 06/30/21, due 07/01/21, maturity value $6,943,730 (collateralized by obligations of a U.S. Treasury Note, 0.125% due 01/15/30, valued at $7,082,659)							6,943,730
Total (Cost $6,943,730)							6,943,730
SECURITIES LENDING COLLATERAL – 0.4%
State Street Navigator Securities Lending Government Money Market Portfolio, 0.01%3			1,024,140				1,024,140
Total (Cost $1,024,140)							1,024,140
TOTAL INVESTMENTS – 100.1%
(Cost $199,664,157)							275,863,206
LIABILITIES LESS CASH AND OTHER ASSETS –(0.1)%							(374,834	)
NET ASSETS – 100.0%						$	275,488,372

 

W. Whitney George, Director¹, Senior Portfolio Manager

Year of Birth: 1958  |  Number of Funds Overseen: 1  |  Tenure: Director since 2013; Term expires 2021  |  Other Directorships: None

Principal Occupation(s) During Past Five Years: President of Sprott Inc. since January 2019; Executive Vice President of Sprott Inc. from January 2016 to January 2019; Chief Investment Officer of Sprott Asset Management, LP, a registered investment adviser, since April 2018; Senior Portfolio Manager since March 2015 and Chairman since January 2017, Sprott Asset Management USA Inc.

Michael W. Clark, Director

Year of Birth: 1959  |  Number of Funds Overseen: 4  |  Tenure: Director since 2015; Term expires 2022  |  Other Directorships: Board of the Sprott Funds Trust

Principal Occupation(s) During Past Five Years: President, Chief Operating Officer, Chief Risk Officer, Head of Executive Committee, and member of Board of Directors of Chilton Investment Company since 2005.

Barbara Connolly Keady, Director

Year of Birth: 1962  |  Number of Funds Overseen: 4  |  Tenure: Director since 2015; Term expires 2023  |  Other Directorships: Board of the Sprott Funds Trust

Principal Occupation(s) During Past Five Years: Director of New Business Development at Ceres Partners since 2010.

Peyton T. Muldoon, Director

Year of Birth: 1969  |  Number of Funds Overseen: 4  |  Tenure: Director since 2017; Term expires 2023  |  Other Directorships: Board of the Sprott Funds Trust

 

Principal Occupation(s) During Past 5 Years: Licensed salesperson, Sotheby’s International Realty, a global real estate brokerage firm since 2011.

James R. Pierce, Jr., Director

Year of Birth: 1956  |  Number of Funds Overseen: 4  |  Tenure: Director since 2015; Term expires 2021  |  Other Directorships: Board of the Sprott Funds Trust

Principal Occupation(s) During Past Five Years: Chairman of JLT Specialty Insurance Services, Inc. since September, 2014.

Thomas W. Ulrich, President, Secretary, Chief Compliance Officer

Year of Birth: 1963  |  Tenure: Since 2015

Principal Occupation(s) During Past Five Years: Managing Director, Sprott Inc. group of companies (since January 2018); General Counsel and Chief Compliance Officer of Sprott Asset Management USA Inc. (since October, 2012); In-House Counsel and Chief Compliance Officer of Sprott Global Resource Investments Ltd. (since October, 2012).

Varinder Bhathal, Treasurer

Year of Birth: 1971  |  Tenure: since 2017

Principal Occupation(s) During Past 5 Years: Chief Financial Officer of Sprott Asset Management LP since Dec 2018;

Managing Director, Corporate Finance and Investment Operations of Sprott Inc. since Oct 2017; Chief Financial Officer of Sprott Capital Partners since Oct 2016; Vice President, Finance of Sprott Inc. Dec 2015 to Oct 2017.

 

 

1	Mr. George is an “interested person”, as defined in Section 2(a)(19) of the 1940 Act, of the Fund due to several relationships including his position as President of Sprott, Inc., the parent company of Sprott Asset Management USA Inc., the Fund’s sub-adviser.

 

Board Approval of Investment Advisory and Sub-Advisory Agreements for Sprott Focus Trust, Inc.

The Board of Directors (the “Board”) of Sprott Focus Trust, Inc. (the “Fund”) met in person at a regularly scheduled meeting on June 4, 2021, in Watch Hill, Rhode Island, for purposes of, among other things, considering whether it would be in the best interests of the Fund and its stockholders for the Board to approve the existing Investment Advisory Agreement by and between the Fund and Sprott Asset Management L.P. (the “Adviser”) and the existing Investment Sub-Advisory Agreement by and among the Fund, the Adviser, and Sprott Asset Management USA Inc. (the “Sub-Adviser”) (the “Sub-Advisory Agreement” and, together with the Investment Advisory Agreement, the “Agreements”).

In connection with the Board’s review of the Agreements, the directors who were not “interested persons” of the Fund within the meaning of the Investment Company Act of 1940, as amended (the “1940 Act”) (collectively, the “Independent Directors”) requested, and the Adviser and Sub-Adviser (together, the “Advisers”) provided the Board with, information about a variety of matters, including, without limitation, the following information:

 

•

nature, extent and quality of services to be provided by the Advisers, including background information on the qualifications and experience of key professional of the Advisers personnel that provide services to the Fund;

•

investment performance of the Fund, including comparative performance information for registered investment companies similar to the Fund;

•

fees charged to and expenses of the Fund, including comparative fee and expense information for registered investment companies similar to the Fund;

•

costs of the services provided, and profits realized by the Advisers;

•

and economies of scale.

In connection with the Board’s review of the Agreements, the Independent Directors considered the matters set forth above along with the following information:

 

•

Whitney George’s long portfolio management tenure with the Fund and its historical investment performance;

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Mr. George’s significant ownership and, thus, stake in the Fund; and

•

the Advisers’ experience in managing pooled investment vehicles and accounts.

At the June 4, 2021 meeting, the Board and the Independent Directors determined that the continuation of the Agreements was in the best interests of the Fund in light of the services, personnel, expenses and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment and approved them.

 

To reach this determination, the Board considered its duties under the 1940 Act as well as under the general principles of state law in reviewing and approving advisory contracts; the fiduciary duty of investment advisers with respect to advisory agreements and the receipt of investment advisory compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of each of the Agreements, the Independent Directors received materials in advance of the Board meeting from the Advisers. The Independent Directors also met with Mr. George. The Board applied its business judgment to determine whether the arrangements by and among the Fund, SAM and SAM USA are reasonable business arrangements from the Fund’s perspective as well as from the perspective of its stockholders.

Nature, Extent and Quality of Services Provided by SAM and SAM USA

The Board considered the following factors to be of fundamental importance to its consideration of the nature, extent and quality of services provided by the Advisers: (i) Mr. George’s long tenure as the portfolio manager of the Fund; (ii) Mr. George’s value investing experience and related track record; (iii) background information on the qualifications and experience of the Advisers’ senior management and the key professional personnel that provide services to the Fund; (iv) the Advisers’ experience in managing pooled investment vehicles and accounts and its related organizational capabilities; and (v) the financial soundness of Sprott Inc., each Adviser’s ultimate parent company. The Board noted and took into account how well both the Adviser and Sub-Adviser continued to operate, with no diminishment of services, during the ongoing COVID-19 crisis. The Board noted that the Adviser, together with the Sub-Adviser, provided compliance services, research, trade execution, operations, risk monitoring, settlement, and service provider monitoring for the Fund. The Board discussed the allocation of responsibilities between the Adviser and Sub-Adviser, noting that portfolio management was delegated to the Sub-Adviser and the Adviser retained oversight responsibilities. The Board concluded that each Adviser had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to continue performing its duties under the Agreements and that the nature, overall quality and extent of the management services provided by the Advisers to the Fund were satisfactory.

Investment Performance

The Board considered that for the one-year period ended March 31, 2021, the Fund returned 66.31%, outperforming

 

the Russell 3000 Index (its benchmark index) and peer group, but underperforming the Fund’s Morningstar/Lipper/Strategic Insight category. The Board noted that since-inception (on November 1, 1996), the Fund had outperformed its benchmark index, Morningstar/Lipper/Strategic Insight category and peer group, and returned 9.74%. For the five and ten-year periods, the Fund underperformed its benchmark index, peer group and Morningstar/Lipper/Strategic Insight category. The Board discussed the differences between the holdings in the Fund’s portfolio and the components of the Russell 3000 Index.

Although the Board recognized that past performance was not necessarily an indicator of future results, it found that Mr. George, SAM, and SAM USA had the necessary qualifications, experience and track record to manage the Fund. In light of the foregoing, the Independent Directors determined that SAM continued to be the appropriate investment adviser for the Fund and that SAM USA continue to be the appropriate investment sub-adviser for the Fund.

Fees and Expenses

The Board considered that the advisory fee payable to the Adviser was 1.00%, and the net expense ratio for the Fund was 1.18%. The Board noted that both the advisory fee and expense ratio were below the peer group averages. The Board noted that the Sub-Adviser did not receive any separate advisory fee from the Fund or the Adviser. After further discussion, the Board concluded that the fees collected by the Adviser for managing the Fund and overseeing the Sub-Adviser were not unreasonable.

Profitability

The Board reviewed the profitability analysis provided by the Adviser with respect to its management of the Fund. The Board considered that no fees or expenses were allocated to the Sub-Adviser, an entity affiliated and under the common control with the Adviser, and as such, the Board did not separately analyze the Sub-Adviser’s profitability. The Board noted that the Adviser earned a profit from managing the Fund over the past year. The Board discussed that the profit was not unreasonable when considering the resources devoted to implementing the Fund’s investment strategy, and the quality of the Fund’s personnel.

Economies of Scale

The Board considered the existence of any economies of scale in the provision of services by the Advisers and whether those economies were shared with the Fund through breakpoints in its management fees or other means, such as expense caps or fee waivers. The Board noted that the assets of the Fund were too small to

meaningfully consider economies of scale and the necessity of breakpoints. The Board concluded that the current fee structure for the Fund was reasonable and that no changes were currently necessary.

Conclusion

It was noted that no single factor was cited as determinative to the decision of the Directors. Rather, after weighing all of the considerations and conclusions discussed above, the entire Board, including all of the Independent Directors, approved the Investment Advisory Agreement and the Sub-Advisory Agreement, concluding that having the Fund continue to receive services from the Advisers under the Agreements was in the best interest of the stockholders of the Fund and that the investment advisory fee rate was reasonable in relation to the services provided.

 

The thoughts expressed in this report concerning recent market movement and future outlook are solely the opinion of Sprott at June 30, 2021 and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Fund’s portfolio and Sprott’s investment intentions with respect to those securities reflect Sprott’s opinions as of June 30, 2021 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in the Fund in the future. Investments in securities of micro-cap, small-cap and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. All publicly released material information is always disclosed by the Fund on the website at www.sprottfocustrust.com.

Sector weightings are determined using the Global Industry Classification Standard (“GICS”). GICS was developed by, and is the exclusive property of, Standard & Poor’s Financial Services LLC (“S&P”) and MSCI Inc. (“MSCI”). GICS is the trademark of S&P and MSCI. “Global Industry Classification Standard (GICS)” and “GICS Direct” are service marks of S&P and MSCI.

All indexes referred to are unmanaged and capitalization weighted. Each index’s returns include net reinvested dividends and/or interest income. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell^® is a trademark of Russell Investment Group. The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Returns for the market indexes used in this report were based on information supplied to Sprott by Russell Investments.

The Price-Earnings, or P/E, Ratio is calculated by dividing a fund’s share price by its trailing 12-month earnings-per share (EPS). The Price-to- Book, or P/B, Ratio is calculated by dividing a fund’s share price by its book value per share. The Sharpe Ratio is calculated for a specified period by dividing a fund’s annualized excess returns by its annualized standard deviation. The higher the Sharpe Ratio, the better a fund’s historical risk-adjusted performance. Standard deviation is a statistical measure within which a fund’s total returns have varied over time. The greater the standard deviation, the greater a fund’s volatility.

Forward-Looking Statements

This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to:

 

•

the Fund’s future operating results

•

the prospects of the Fund’s portfolio companies

•

the impact of investments that the Fund has made or may make

•

the dependence of the Fund’s future success on the general economy and its impact on the companies and industries in which the Fund invests, and

•

the ability of the Fund’s portfolio companies to achieve their objectives.

This report uses words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason.

The Fund has based the forward-looking statements included in this report on information available to us on the date of the report, and we assume no obligation to update any such forward-looking statements. Although the Fund undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make through future stockholder communications or reports.

Authorized Share Transactions

The Board authorized a share repurchase program, under which the Fund may purchase up to 5% of its outstanding common shares between November 20, 2020 and December 31, 2021. Any such repurchase would take place at then prevailing prices in the open market or in other transactions. Common stock repurchases would be effected at a price per share that is less than the share’s then current net asset value.

The Fund is also authorized to offer its common stockholders an opportunity to subscribe for additional shares of its common stock through rights offerings at a price per share that may be less than the share’s then current net asset value. The timing and terms of any such offerings are within the Board’s discretion.

Proxy Voting

A copy of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities and information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, on the Fund’s website at www.sprottfocustrust.com, by calling (203) 656-2430 (toll-free) and on the website of the Securities and Exchange Commission, at www.sec.gov.

 

Quarterly Portfolio Disclosure

The Fund files its complete schedule of investments with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT filings are available on the SEC’s website at www.sec.gov. The Fund’s holdings are also on the Fund’s website (www.sprottfocustrust.com) approximately 15 to 20 days after each calendar quarter end and remain available until the next quarter’s holdings are posted.