UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05379
SPROTT FOCUS TRUST, INC.
(Exact name of registrant as specified in charter)
Royal Bank Plaza, South Tower
200 Bay Street, Suite 2600
Toronto, Ontario, Canada M5J 2J1
(Address of principal executive offices)
The Prentice-Hall Corporation System, MA
7 St. Paul Street, Suite 820
Baltimore, MD 21202
(Name and address of agent for service)
Registrants telephone number, including area code: (760) 444-5297
Date of fiscal year end: December 31, 2018
Date of reporting period: January 1, 2018 December 31, 2018
Item 1. Reports to Shareholders.
December 31, 2018
Sprott Focus Trust
2018 Annual
Review and Report to Stockholders
sprottfocustrust.com
1 | ||||
2 | ||||
8 | ||||
9 | ||||
10 | ||||
21 | ||||
Board Approval of Investment Advisory and Subadvisory Agreements |
22 | |||
24 |
Managed Distribution Policy
The Board of Directors of Sprott Focus Trust, Inc. (the Fund) has authorized a managed distribution policy (MDP). Under the MDP, the Fund pays quarterly distributions at an annual rate of 6% of the average of the prior four quarter-end net asset values, with the fourth quarter being the greater of this annualized rate or the distribution required by IRS regulations. With each distribution, the Fund will issue a notice to its stockholders and an accompanying press release that provides detailed information regarding the amount and composition of the distribution (including whether any portion of the distribution represents a return of capital) and other information required by the Funds MDP. You should not draw any conclusions about the Funds investment performance from the amount of distributions or from the terms of the Funds MDP. The Funds Board of Directors may amend or terminate the MDP at any time without prior notice to stockholders.
NAV Average Annual Total Returns
As of December 31, 2018 (%)
FUND | 1-YR | 3-YR | 5-YR | 10-YR | 15-YR | 20-YR | SINCE INCEPTION | INCEPTION DATE | ||||||||||||||||||||||||
Sprott Focus Trust |
(17.01 | ) | 7.06 | 1.82 | 9.37 | 6.80 | 8.63 | 8.54 | 11/1/96 | 1 | ||||||||||||||||||||||
INDEX | ||||||||||||||||||||||||||||||||
Russell 30002 |
(5.24 | ) | 8.97 | 7.91 | 13.18 | 7.89 | 5.96 | 8.00 |
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 | 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. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. |
Important Performance and Risk Information
All performance information reflects past performance, is presented on a total return basis, net of the Funds investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the most recent month-end may be obtained at www.sprottfocustrust.com. The market price of the Funds shares will fluctuate, so shares may be worth more or less than their original cost when sold.
The Fund is a closed-end registered investment company whose shares of common stock may trade at a discount to their net asset value. Shares of the Funds common stock are also subject to the market risks of investing in the underlying portfolio securities held by the Fund.
The Funds shares of common stock trade on the Nasdaq Select Market. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering, shares of closed-end funds are sold on the open market through a stock exchange. For additional information, contact your financial advisor or call (203) 656-2430. Investment policies, management fees and other matters of interest to prospective investors may be found in the closed-end fund prospectus used in its initial public offering, as revised by subsequent stockholder reports.
2018 Annual Report to Stockholders | 1 |
MANAGERS DISCUSSION | ||
Sprott Focus Trust |
Whitney George
2 | 2018 Annual Report to Stockholders |
MANAGERS DISCUSSION |
2018 Annual Report to Stockholders | 3 |
MANAGERS DISCUSSION |
4 | 2018 Annual Report to Stockholders |
MANAGERS DISCUSSION |
2018 Annual Report to Stockholders | 5 |
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6 | 2018 Annual Report to Stockholders |
PERFORMANCE AND PORTFOLIO REVIEW | SYMBOLS MARKET PRICE FUND NAV XFUNX |
Important Performance and Risk Information
All performance information reflects past performance, is presented on a total return basis, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the most recent month-end may be obtained at www.SprottFocusTrust.com. The market price of the Funds shares will fluctuate, so shares may be worth more or less than their original cost when sold. The Fund normally invests primarily in small/mid cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund also generally invests a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a broadly diversified portfolio because a decline in the value of any one of these stocks would cause the Funds overall value to decline to a greater degree. Regarding the Top Contributors and Top Detractors tables shown on page 3, the sum of all contributors to, and all detractors from, performance for all securities in the portfolio would approximate the Funds performance for 2018.
2018 Annual Report to Stockholders | 7 |
The following table details the share accumulations by an initial investor in the Funds who reinvested all distributions and participated fully in primary subscriptions for each of the rights offerings. Full participation in distribution reinvestments and rights offerings can maximize the returns available to a long-term investor. This table should be read in conjunction with the Performance and Portfolio Reviews of the Funds.
HISTORY | AMOUNT REINVESTED | PURCHASE PRICE1 | SHARES | NAV VALUE2 | MARKET VALUE2 | |||||||||||||||||
10/31/96 | Initial Purchase |
$ | 4,375 | $ | 4.375 | 1,000 | $ | 5,280 | $ | 4,375 | ||||||||||||
12/31/96 | 5,520 | 4,594 | ||||||||||||||||||||
12/5/97 | Distribution $0.53 |
5.250 | 101 | 6,650 | 5,574 | |||||||||||||||||
12/31/98 | 6,199 | 5,367 | ||||||||||||||||||||
12/6/99 | Distribution $0.145 |
4.750 | 34 | 6,742 | 5,356 | |||||||||||||||||
12/6/00 | Distribution $0.34 |
5.563 | 69 | 8,151 | 6,848 | |||||||||||||||||
12/6/01 | Distribution $0.145 |
6.010 | 28 | 8,969 | 8,193 | |||||||||||||||||
12/6/02 | Distribution $0.09 |
5.640 | 19 | 7,844 | 6,956 | |||||||||||||||||
12/8/03 | Distribution $0.62 |
8.250 | 94 | 12,105 | 11,406 | |||||||||||||||||
2004 | Annual distribution total $1.74 |
9.325 | 259 | 15,639 | 16,794 | |||||||||||||||||
5/6/05 | Rights offering |
2,669 | 8.340 | 320 | ||||||||||||||||||
2005 | Annual distribution total $1.21 |
9.470 | 249 | 21,208 | 20,709 | |||||||||||||||||
2006 | Annual distribution total $1.57 |
9.860 | 357 | 24,668 | 27,020 | |||||||||||||||||
2007 | Annual distribution total $2.01 |
9.159 | 573 | 27,679 | 27,834 | |||||||||||||||||
2008 | Annual distribution total $0.473 |
6.535 | 228 | 15,856 | 15,323 | |||||||||||||||||
3/11/09 | Distribution $0.093 |
3.830 | 78 | 24,408 | 21,579 | |||||||||||||||||
12/31/10 | 29,726 | 25,806 | ||||||||||||||||||||
2011 | Annual distribution total $0.413 |
6.894 | 207 | 26,614 | 22,784 | |||||||||||||||||
2012 | Annual distribution total $0.46 |
6.686 | 255 | 29,652 | 25,549 | |||||||||||||||||
2013 | Annual distribution total $0.40 |
7.222 | 219 | 35,501 | 31,166 | |||||||||||||||||
2014 | Annual distribution total $0.42 |
7.890 | 222 | 35,617 | 31,348 | |||||||||||||||||
2015 | Annual distribution total $0.44 |
6.655 | 296 | 31,657 | 26,726 | |||||||||||||||||
2016 | Annual distribution total $0.40 |
6.609 | 287 | 36,709 | 31,423 | |||||||||||||||||
2017 | Annual distribution total $0.52 |
7.603 | 345 | 46,794 | 41,502 | |||||||||||||||||
2018 | Annual distribution total $0.69 |
6.782 | 565 | 38,836 | 33,669 | |||||||||||||||||
12/31/2018 | $ | 7,044 | 5,805 |
1 | The purchase price used for annual distribution totals is a weighted average of the distribution reinvestment prices for the year. |
2 | Values are stated as of December 31 of the year indicated, after reinvestment of distributions. |
3 | Includes a return of capital. |
8 | 2018 Annual Report to Stockholders |
Distribution Reinvestment and Cash Purchase Options
2018 Annual Report to Stockholders | 9 |
Sprott Focus Trust | December 31, 2018 |
10 | 2018 Annual Report to Stockholders |
Sprott Focus Trust (continued) |
1 | Security (or a portion of the security) is on loan. As of December 31, 2018, the market value of securities loaned was $28,837,318. The loaned securities were secured with cash collateral of $6,014,564 and non-cash collateral with a value of $23,022,055. The non-cash collateral received consists of equity securities, and is held for the benefit of the Fund at the Funds custodian. The Fund cannot repledge or resell this collateral. Collateral is calculated based on prior days prices. |
2 | Non-Income producing. |
3 | Represents an investment of securities lending cash collateral. |
2018 Annual Report to Stockholders | 11 |
Sprott Focus Trust | December 31, 2018 |
Statement of Assets and Liabilities
ASSETS: |
| |||
Investments at value |
$ | 183,792,483 | ||
Repurchase agreements (at cost and value) |
3,828,000 | |||
Foreign currencies at value |
288,298 | |||
Cash |
213 | |||
Receivable for dividends and interest |
391,559 | |||
Receivable for securities lending income |
14,149 | |||
Prepaid expenses and other assets |
2,481 | |||
Total Assets |
188,317,183 | |||
LIABILITIES: |
| |||
Obligation to return securities lending collateral |
6,014,564 | |||
Payable for investment advisory fee |
144,278 | |||
Audit fees |
37,200 | |||
Legal fees |
242,044 | |||
Trustee fees |
36,000 | |||
Administration fees |
45,245 | |||
Accrued expenses |
48,990 | |||
Total Liabilities |
6,568,321 | |||
Net Assets |
$ | 181,748,862 | ||
ANALYSIS OF NET ASSETS: |
||||
Paid-in capital - $0.001 par value per share; 27,154,196 shares outstanding (150,000,000 shares authorized) |
$ | 177,847,945 | ||
Distributable Earnings |
3,900,917 | |||
Net Assets (net asset value per share $6.69) |
$ | 181,748,862 | ||
Investments (excluding repurchase agreements) at identified cost |
$ | 179,017,644 | ||
Foreign Currencies at Cost |
$ | 286,236 |
12 | 2018 Annual Report to Stockholders | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS |
Sprott Focus Trust | December 31, 2018 |
Statement of Operations
INVESTMENT INCOME: |
| |||
INCOME: |
| |||
Dividends |
$ | 6,621,090 | ||
Foreign withholding tax |
(83,727 | ) | ||
Interest |
37,182 | |||
Securities lending |
387,844 | |||
Total Income |
6,962,389 | |||
EXPENSES: |
| |||
Investment advisory fees |
2,171,916 | |||
Stockholders reports |
52,830 | |||
Custody and transfer agent fees |
57,890 | |||
Directors fees |
44,999 | |||
Audit fees |
37,200 | |||
Legal Fees |
201,099 | |||
Administrative and office facilities |
60,262 | |||
Other expenses |
56,387 | |||
Total expenses |
2,682,583 | |||
Expense reimbursement |
(74,459 | ) | ||
Net expenses |
2,608,124 | |||
Net Investment Income (loss) |
4,354,265 | |||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: |
| |||
NET REALIZED GAIN (LOSS): |
| |||
Investments |
8,504,942 | |||
Foreign currency transactions |
(20,308 | ) | ||
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): |
| |||
Investments and foreign currency translations |
(51,970,515 | ) | ||
Other assets and liabilities denominated in foreign currency |
(4,057 | ) | ||
Net realized and unrealized gain (loss) on investments and foreign currency |
(43,489,938 | ) | ||
NET INCREASE (DECREASE) IN NET ASSETS FROM INVESTMENT OPERATIONS |
$ | (39,135,673 | ) |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS | 2018 Annual Report to Stockholders | 13 |
Sprott Focus Trust | December 31, 2018 |
Statement of Changes
YEAR ENDED DEC. 31, 2018 |
YEAR ENDED DEC. 31, 2017 |
|||||||
INVESTMENT OPERATIONS: |
| |||||||
Net investment income (loss) |
$ | 4,354,265 | $ | 2,352,557 | ||||
Net realized gain (loss) on investments and foreign currency |
8,484,634 | 13,049,114 | ||||||
Net change in unrealized appreciation (depreciation) on investments and foreign currency |
(51,974,572 | ) | 20,135,033 | |||||
Net increase (decrease) in net assets from investment operations |
(39,135,673 | ) | 35,536,704 | |||||
DISTRIBUTIONS: |
| |||||||
Total Distributions |
(17,912,915 | ) | (12,973,750 | ) | ||||
CAPITAL SHARE TRANSACTIONS: |
| |||||||
Reinvestment of distributions |
10,805,468 | 8,122,566 | ||||||
Total capital stock transactions |
10,805,468 | 8,122,566 | ||||||
Net increase (decrease) in Net Assets |
(46,243,120 | ) | 30,685,520 | |||||
NET ASSETS |
| |||||||
Beginning of period |
227,991,982 | 197,306,462 | ||||||
End of period |
$ | 181,748,862 | $ | 227,991,982 |
1 | For the period ended December 31, 2017, the fund distributed to shareholders $2,123,800 from net investment income and $10,849,950 from net realized gains. The SEC eliminated the requirement to disclose distributions to shareholders from net investment income and from net realized gains in 2018. |
2 | End of period Net assets include net investment income not yet distributed of $2,130,165 at December 31, 2017. The SEC eliminated the requirement to disclose undistributed net investment income in 2018. |
14 | 2018 Annual Report to Stockholders | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS |
Sprott Focus Trust | December 31, 2018 |
Financial Highlights
This table is presented to show selected data for a share of Common Stock outstanding throughout each period, and to assist stockholders in evaluating the Funds performance for the periods presented.
YEAR ENDED DEC. 31, 2018 |
YEAR ENDED DEC. 31, 2017 |
YEAR ENDED DEC. 31, 2016 |
YEAR ENDED DEC. 31, 2015 |
YEAR ENDED DEC. 31, 2014 |
||||||||||||||||
Net Asset Value, Beginning of Period |
$ | 8.93 | $ | 8.07 | $ | 6.87 | $ | 8.26 | $ | 8.68 | ||||||||||
INVESTMENT OPERATIONS: |
| |||||||||||||||||||
Net investment income (loss)1 |
0.17 | 0.09 | 0.14 | 0.11 | 0.07 | |||||||||||||||
Net realized and unrealized gain (loss) on investments and foreign currency |
(1.67 | ) | 1.33 | 1.50 | (1.02 | ) | (0.04 | ) | ||||||||||||
Total investment operations |
(1.50 | ) | 1.42 | 1.64 | (0.91 | ) | 0.03 | |||||||||||||
DISTRIBUTIONS TO COMMON STOCKHOLDERS: |
| |||||||||||||||||||
Net investment income |
(0.24 | ) | (0.09 | ) | (0.10 | ) | (0.10 | ) | (0.08 | ) | ||||||||||
Net realized gain on investments and foreign currency |
(0.45 | ) | (0.43 | ) | (0.30 | ) | (0.34 | ) | (0.34 | ) | ||||||||||
Total distributions to Common Stockholders |
(0.69 | ) | (0.52 | ) | (0.40 | ) | (0.44 | ) | (0.42 | ) | ||||||||||
CAPITAL STOCK TRANSACTIONS: |
| |||||||||||||||||||
Effect of reinvestment of distributions by Common Stockholders |
(0.05 | ) | (0.04 | ) | (0.04 | ) | (0.04 | ) | (0.03 | ) | ||||||||||
Total capital stock transactions |
(0.05 | ) | (0.04 | ) | (0.04 | ) | (0.04 | ) | (0.03 | ) | ||||||||||
Net Asset Value, End of Period |
$ | 6.69 | $ | 8.93 | $ | 8.07 | $ | 6.87 | $ | 8.26 | ||||||||||
Market Value, End of Period |
$ | 5.78 | $ | 7.92 | $ | 6.94 | $ | 5.80 | $ | 7.27 | ||||||||||
TOTAL RETURN:2 |
| |||||||||||||||||||
Net Asset Value |
(17.01 | )% | 18.46 | % | 24.83 | % | (11.12 | )% | 0.32 | % | ||||||||||
Market Value |
(19.15 | )% | 22.17 | % | 27.16 | % | (14.74 | )% | 0.58 | % | ||||||||||
RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: |
| |||||||||||||||||||
Investment Advisory fee expense |
1.00 | % | 1.00 | % | 1.00 | % | 1.00 | % | 1.00 | % | ||||||||||
Other operating expenses |
0.24 | % | 0.26 | % | 0.28 | % | 0.26 | % | 0.15 | % | ||||||||||
Net expenses |
1.20 | % | 1.20 | % | 1.20 | % | 1.19 | % | 1.15 | % | ||||||||||
Expenses prior to balance credits |
1.24 | % | 1.26 | % | 1.28 | % | 1.26 | % | 1.15 | % | ||||||||||
Net investment income (loss) |
2.00 | % | 1.11 | % | 1.82 | % | 1.41 | % | 0.78 | % | ||||||||||
SUPPLEMENTAL DATA: |
| |||||||||||||||||||
Net Assets Applicable to Common Stockholders, End of Period (in thousands) |
$ | 181,749 | $ | 227,992 | $ | 197,306 | $ | 162,117 | $ | 187,749 | ||||||||||
Portfolio Turnover Rate |
31 | % | 29 | % | 35 | % | 34 | % | 29 | % |
1 | Calculated using average shares outstanding during the period. |
2 | The Market Value Total Return is calculated assuming a purchase of Common Stock on the opening of the first business day and a sale on the closing of the last business day of each period. Dividends and distributions are assumed for the purposes of this calculation to be reinvested at prices obtained under the Funds Distribution Reinvestment and Cash Purchase Plan. Net Asset Value Total Return is calculated on the same basis, except that the Funds net asset value is used on the purchase and sale dates instead of market value. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS | 2018 Annual Report to Stockholders | 15 |
Sprott Focus Trust
Notes to Financial Statements
Summary of Significant Accounting Policies:
Sprott Focus Trust, Inc. (the Fund) is a diversified closed-end investment company incorporated under the laws of the State of Maryland. The Fund commenced operations on March 2, 1988, and Sprott Asset Management LP and Sprott Asset Management USA Inc. (collectively, Sprott) assumed investment management responsibility for the Fund after the close of business on March 6, 2015. Royce & Associates, LLC was the Funds previous investment manager.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
The Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 Financial Services-Investment Companies.
Effective November 5, 2018, the Fund adopted SEC Regulation S-X disclosure requirement changes. The adopted changes are reflected throughout this report.
At December 31, 2018, officers, employees of Sprott, Fund directors, and other affiliates owned 35% of the Fund.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses for the period. Actual results could differ from these estimates.
VALUATION OF INVESTMENTS:
Securities are valued as of the close of trading on the New York Stock Exchange (NYSE) (generally 4:00 p.m. Eastern time) on the valuation date. Securities that trade on an exchange, and securities traded on Nasdaqs Electronic Bulletin Board, are valued at their last reported sales price or Nasdaq official closing price taken from the primary market in which each security trades or, if no sale is reported for such day, at their highest bid price. Other over-the-counter securities for which market quotations are readily available are valued at their highest bid price, except in the case of some bonds and other fixed income securities which may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services. The Fund values its non-U.S. dollar denominated securities in U.S. dollars daily at the prevailing foreign currency exchange rates as quoted by a major bank. Securities for which market quotations are not readily available are valued at their fair value in accordance with the provisions of the 1940 Act, under procedures approved by the Funds Board of Directors, and are reported as Level 3 securities. As a general principle, the fair value of a security is the amount which the Fund might reasonably expect to receive for the security upon its current sale. However, in light of the judgment involved in fair valuations, there can be no assurance that a fair value assigned to a particular security will be the amount which the Fund might be able to receive upon its current sale. In addition, if, between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. The Fund uses an independent pricing service to provide fair value estimates for relevant non-U.S. equity securities on days when the U.S. market volatility exceeds a certain threshold. This pricing service uses proprietary correlations it has developed between the movement of prices of non-U.S. equity securities and indices of U.S.-traded securities, futures contracts and other indications to estimate the fair value of relevant non-U.S. securities. When fair value pricing is employed, the prices of securities used by the Fund may differ from quoted or published prices for the same security. Investments in money market funds are valued at net asset value per share.
Various inputs are used in determining the value of the Funds investments, as noted above. These inputs are summarized in the three broad levels below:
Level 1 quoted | prices in active markets for identical securities. |
Level 2 other | significant observable inputs (including quoted prices for similar securities, foreign securities that may be fair valued and repurchase agreements). |
16 | 2018 Annual Report to Stockholders |
Sprott Focus Trust
Notes to Financial Statements (continued)
Level 3 significant | unobservable inputs (including last trade price before trading was suspended, or at a discount thereto for lack of marketability or otherwise, market price information regarding other securities, information received from the company and/or published documents, including SEC filings and financial statements, or other publicly available information). |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the Funds investments as of December 31, 2018 based on the inputs used to value them. For a detailed breakout of common stocks by sector classification, please refer to the Schedule of Investments.
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Common Stocks |
$ | 174,876,769 | $ | 2,901,150 | $ | | $ | 177,777,919 | ||||||||
Cash Equivalents |
| 3,828,000 | | 3,828,000 | ||||||||||||
Securities Lending Collateral |
6,014,564 | | | 6,014,564 | ||||||||||||
Total |
$ | 180,891,333 | $ | 6,729,150 | $ | | $ | 187,620,483 |
On December 31, 2018, foreign common stocks in the Fund were valued at the last reported sale price or official closing price as the Funds fair value pricing procedures did not require the use of the independent statistical fair value pricing service. There were no transfers between levels for investments held at the end of the period.
REPURCHASE AGREEMENTS:
The Fund may enter into repurchase agreements with institutions that the Funds investment adviser has determined are creditworthy. The Fund restricts repurchase agreements to maturities of no more than seven days. Securities pledged as collateral for repurchase agreements, which are held until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). Repurchase agreements could involve certain risks in the event of default or insolvency of the counter-party, including possible delays or restrictions upon the ability of the Fund to dispose of its underlying securities. The maturity associated with these securities is considered continuous.
FOREIGN CURRENCY:
Net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, sales of foreign currencies, expiration of currency forward contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, including investments in securities at the end of the reporting period, as a result of changes in foreign currency exchange rates.
TAXES:
As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year.
The cost of total investments for Federal income tax purposes was $183,509,516. At December 31, 2018, net unrealized appreciation for all securities was $4,110,967, consisting of aggregate gross unrealized appreciation of $21,636,099 and aggregate gross unrealized depreciation of $(17,525,132).
DISTRIBUTIONS:
The Fund pays quarterly distributions on the Funds Common Stock at the annual rate of 6% of the rolling average of the prior four calendar quarter-end NAVs of the Funds Common Stock, with the fourth quarter distribution being the greater of 1.5% of the rolling average or the distribution required by IRS regulations. Prior to November 15, 2012, distributions to Preferred Stockholders were accrued daily and paid quarterly. Distributions to Common Stockholders are recorded on ex-dividend date. Distributable capital gains and/or net investment income were first allocated to Preferred Stockholder distributions, with any excess allocable to Common Stockholders. If capital gains and/or net investment income were allocated to both Preferred and Common Stockholders, the tax character of such allocations was proportional. To the extent that distributions are not paid from long-term capital gains, net investment income or net short-term capital gains,
2018 Annual Report to Stockholders | 17 |
Sprott Focus Trust
Notes to Financial Statements (continued)
they will represent a return of capital. Distributions are determined in accordance with income tax regulations that may differ from accounting principles generally accepted in the United States of America. Permanent book and tax differences relating to stockholder distributions will result in reclassifications within the capital accounts. Undistributed net investment income may include temporary book and tax basis differences, which will reverse in a subsequent period. Any taxable income or gain remaining undistributed at fiscal year end is distributed in the following year.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date. Non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on an accrual basis. Premium and discounts on debt securities are amortized using the effective yield-to-maturity method. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes.
EXPENSES:
The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Funds operations, while expenses applicable to more than one fund managed by Sprott are allocated equitably.
COMPENSATING BALANCE CREDITS:
The Fund has an arrangement with its custodian bank, whereby a portion of the custodians fee is paid indirectly by credits earned on the Funds cash on deposit with the bank. This deposit arrangement is an alternative to purchasing overnight investments. Conversely, the Fund pays interest to the custodian on any cash overdrafts, to the extent they are not offset by credits earned on positive cash balances.
CAPITAL STOCK:
The Fund issued 1,635,434 and 1,070,002 shares of Common Stock as reinvestments of distributions for the years ended December 31, 2018 and the year ended December 31, 2017, respectively.
INVESTMENT ADVISORY AGREEMENT:
The Investment Advisory Agreement between Sprott and the Fund provides for fees to be paid at an annual rate of 1.0% of the Funds average daily net assets. The Fund accrued and paid investment advisory fees totaling $2,171,916 to Sprott for the period ended December 31, 2018. Sprott reimbursed $74,459 of the Funds operating expenses for the period ended December 31, 2018. Sprott is not entitled to recoup any fees waived.
PURCHASES AND SALES OF INVESTMENT SECURITIES:
For the year ended December 31, 2018, the costs of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $70,741,033 and $63,290,992, respectively.
Distributions to Stockholders:
The tax character of distributions paid to common stockholders during 2018 and 2017 were as follows:
DISTRIBUTIONS PAID FROM INCOME: | 2018 | 2017 | ||||||
Ordinary Income |
$ | 6,271,764 | $ | 2,123,800 | ||||
Long-term capital gain |
11,641,151 | 10,849,950 | ||||||
$ | 17,912,915 | $ | 12,973,750 |
As of December 31, 2018, the tax basis components of distributable earnings included in stockholders equity were as follows:
Net unrealized appreciation (depreciation) |
$ | 4,111,196 | ||
Post October loss* |
(601,735 | ) | ||
Undistributed ordinary income |
391,456 | |||
$ | 3,900,917 |
* | Under current tax law, capital losses and foreign currency losses after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. |
18 | 2018 Annual Report to Stockholders |
Sprott Focus Trust
Notes to Financial Statements (continued)
The difference between book and tax basis unrealized appreciation (depreciation) is attributable primarily to deferral of losses on wash sales and the realization for tax purposes of unrealized gains on investments in passive foreign investment companies. For financial reporting purposes, capital accounts and distributions to stockholders are adjusted to reflect the tax character of permanent book/tax differences. Any permanent differences resulting from different book and tax treatment are reclassified at year-end and have no impact on net income, NAV or NAV per share to the fund. For the year ended December 31, 2018 there were no permanent differences requiring a reclassification between total distributable earnings/(losses) and paid-in capital.
Management has analyzed the Funds tax positions taken on federal income tax returns for all open tax years (2015-2018) and has concluded that as of December 31, 2018, no provision for income tax is required in the Funds financial statements.
Lending of Portfolio Securities:
The Fund, using State Street Bank and Trust Company (State Street) as its lending agent, may loan securities to qualified brokers and dealers in exchange for negotiated lenders fees. The Fund receives cash collateral, which may be invested by the lending agent in short-term instruments, in an amount at least equal to 102% (for loans of U.S. securities) or 105% (for loans of non-U.S. securities) of the market value of the loaned securities at the inception of each loan. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. As of December 31, 2018, the cash collateral received by the Fund was invested in the State Street Navigator Securities Lending Government Money Market Portfolio, which is a 1940 Act money market fund. To the extent that advisory or other fees paid by the State Street Navigator Securities Lending Government Money Market Portfolio are for the same or similar services as fees paid by the Fund, there will be a layering of fees, which would increase expenses and decrease returns. Information regarding the value of the securities loaned and the value of the collateral at period end is included in the Schedule of Investments. The Fund could experience a delay in recovering its securities, a possible loss of income or value and record realized gain or loss on securities deemed sold due to a borrowers inability to return securities on loan. These loans involve the risk of delay in receiving additional collateral in the event that the collateral decreases below the value of the securities loaned and the risks of the loss of rights in the collateral should the borrower of the securities experience financial difficulties.
As of December 31, 2018, the Fund had outstanding loans of securities to certain approved brokers for which the Fund received collateral:
Market Value of Loaned Securities |
Market Value of Cash Collateral |
Market Value of Non Cash Collateral |
Total Collateral | |||||||||
$28,837,318 | $ | 6,014,564 | $ | 23,022,055 | $ | 29,036,619 |
Other information regarding the Fund is available in the Funds most recent Report to Stockholders. This information is available through Sprott Asset Managements website www.sprott.com and on the Securities and Exchange Commissions website (http://www.sec.gov).
The following table presents financial instruments that are subject to enforceable netting arrangements as of December 31, 2018.
Gross Amounts Not Offset in the Statement of Assets and Liabilities
Gross Asset Amounts Presented in Statement of Assets and Liabilities(a) |
Financial Instrument |
Collateral Received(b) |
Net Amount (not less than $0) |
|||||||||
$28,837,318 | | ($ | 28,837,318 | ) | |
(a) | Represents market value of loaned securities at year end. |
(b) | The actual collateral received is greater than the amount shown here due to collateral requirements of the security lending agreement. |
All securities on loan are classified as Common Stock in the Funds Schedule of Investments as of December 31, 2018, with a contractual maturity of overnight and continuous.
2018 Annual Report to Stockholders | 19 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and The Board of Trustees of
Sprott Focus Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of Sprott Focus Trust Inc., (the Fund), including the schedule of investments, as of December 31, 2018, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and financial highlights for each of the five years in the period then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Funds management. Our responsibility is to express an opinion on the Funds financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We have served as the Funds auditor since 1998.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Funds internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
February 27, 2019
20 | 2018 Annual Report to Stockholders |
All Directors and Officers may be reached c/o Sprott Asset Management LP, 200 Bay Street, Suite 2600, Toronto, Ontario, Canada M5J2J1.
2018 Annual Report to Stockholders | 21 |
Board Approval of Investment Advisory and Subadvisory Agreements
22 | 2018 Annual Report to Stockholders |
Board Approval of Investment Advisory and Subadvisory Agreements (continued)
2018 Annual Report to Stockholders | 23 |
Notes to Performance and Other Important Information
24 | 2018 Annual Report to Stockholders |
Notes to Performance and Other Important Information (continued)
2018 Annual Report to Stockholders | 25 |
Contact Us
GENERAL INFORMATION
Additional Report Copies and
Prospectus Inquiries
(203) 656-2430
COMPUTERSHARE
Transfer Agent and Registrar
Speak with a representative about:
| Your account, transactions, and forms |
(800) 426-5523
sprottfocustrust.com
Item 2. Code(s) of Ethics. As of the end of the period covered by this report, the Registrant had adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.
Item 3. Audit Committee Financial Expert.
(a)(1) The Board of Directors of the Registrant has determined that it has an audit committee financial expert.
(a)(2) Michael W. Clark is designated by the Board of Directors as the Registrants Audit Committee Financial Expert. Mr. Clark is independent as defined under Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) | Audit Fees: |
Year ended December 31, 2018 $37,200
Year ended December 31, 2017 $37,200
(b) | Audit-Related Fees: |
Year ended December 31, 2017 $0
Year ended December 31, 2016 $0
(c) | Tax Fees: |
Year ended December 31, 2018 $7,200 Preparation of tax returns
Year ended December 31, 2017 $7,200 Preparation of tax returns
(d) | All Other Fees: |
Year ended December 31, 2017 $0
Year ended December 31, 2016 $0
(e)(1) The Registrant has adopted policies and procedures requiring the pre-approval by the Audit Committee of audit and non-audit services provided to the Registrant by the Registrants independent registered public accounting firm, and the pre-approval of all audit and non-audit services provided to the Registrants investment adviser and any and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant, to the extent that such services are directly related to the operations or financial reporting of the Registrant.
(e)(2) | Not Applicable |
(f) | Not Applicable |
(g) | Year ended December 31, 2018 $7,200 |
Year ended December 31, 2017 $7,200
(h) | No such services were rendered during 2018 or 2017. |
Item 5. Audit Committee of Listed Registrants. The Registrant has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Michael W. Clark, Barbara C. Keady, Peyton T. Muldoon and James R. Pierce, Jr. are members of the Registrants audit committee.
Item 6. Investments.
(a) See Item 1.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. The Registrants Board has delegated all proxy voting decisions to Sprott Asset Management LP, the investment adviser to the Registrant (the Adviser). The Adviser has adopted written proxy voting policies and procedures for itself, the Fund, and any other client accounts for which the Adviser is responsible for voting proxies. From time to time, a vote may present a conflict between the interests of the Registrants shareholders, on the one hand, and those of the Adviser, or any affiliated person of the Registrant or the Adviser, on the other. If the Adviser becomes aware of any material conflict of interest in voting proxies with respect to the Registrant, the Adviser shall notify the Board of Directors of the Registrant and request the Boards recommendations for protecting the best interests of Registrants shareholders.
PROXY VOTING POLICY AND PROCEDURES
I. | STATEMENT OF POLICY |
Proxy voting is an important right of shareholders and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised. When the Adviser has discretion to vote the proxies of its clients, it will vote those proxies in the best interest of its clients and in accordance with these policies and procedures.
II. | VOTING GUIDELINES |
In the absence of specific voting guidelines from the client, the Adviser will vote proxies in the best interests of each particular client, which may result in different voting results for proxies for the same issuer. The Adviser believes that voting proxies in accordance with the following guidelines is in the best interests of its clients.
Generally speaking, the Adviser will vote in favor of the following proxy proposals:
(i) electing and fixing number of directors
(ii) appointing auditors
(iii) ratifying director actions
(iv) approving private placements exceeding a 25% threshold
(v) changing a registered address
(vi) authorizing directors to fix remuneration of auditors
(vii) approving private placements to insiders exceeding a 10% threshold
(viii) approving special resolutions to change the authorized capital of the company to an unlimited number of common shares without par value.
The Adviser will generally vote against any proposal relating to stock option plans that:
(i) exceed 5% of the common shares issued and outstanding at the time of grant over a three year period (on a non-diluted basis);
(ii) provide that the maximum number of common shares issuable pursuant to such plan be a rolling maximum that exceed 5% of the outstanding common shares at the date of the grant of applicable options; or
(iii) reprices the stock option.
In certain cases, proxy votes may not be cast when the Adviser determines that it is not in the best interests of the client to vote such proxies.
The Adviser retains the discretion to depart from these polices on any particular proxy vote depending upon the facts and circumstances.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) Portfolio Managers of Closed-End Management Investment Companies (information as of December 31, 2017)
Name |
Title |
Length of Service |
Principal Occupation(s) During Past 5 Years | |||
W. Whitney George | Senior Portfolio Manager of Sprott Asset Management USA Inc.; Director of the Registrant |
Since July 2002 | Senior Portfolio Manager of Sprott Asset Management USA Inc., a registered investment adviser since March 2015; President of Sprott Inc. since January 2019. Prior thereto, Managing Director and Vice President of Royce & Associates, LLC. |
(a)(2) Other Accounts Managed by Portfolio Manager and Potential Conflicts of Interest (information as of December 31, 2018)
Other Accounts
Type of Account |
Number of Accounts Managed |
Total Assets Managed |
Number of Accounts Managed for which Advisory Fee is Performance- Based |
Value of Managed Accounts for which Advisory Fee is Performance Based |
||||||||||||
Registered investment companies |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Private pooled investment vehicles |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other accounts |
0 | $ | 0 | 0 | 0 |
Conflicts of Interest
The Portfolio Manager has day-to-day management responsibility for more than one account. This may create actual, potential or apparent conflicts of interest, as the Portfolio Manager may not be able to devote the same amount of time and attention to each account, or may give preferential treatment of one account over others in terms of allocation of resources or investment opportunities. The Portfolio Manager is subject to the policies and procedures of Sprott Asset Management USA Inc., the sub-adviser to the Registrant (the Sub-Adviser), that are intended to address conflicts of interest relating to the management of multiple accounts, including accounts that have different fee arrangements, and the allocation of investment opportunities. The Sub-Adviser reviews investment decisions of its investment personnel, including the Portfolio Manager, for the purpose of ensuring that all accounts with substantially similar investment objectives are treated equitably. The performance of similarly managed accounts is also compared to determine whether there are any unexplained significant discrepancies. In addition, the Sub-Advisers procedures relating to the allocation of investment opportunities require that similar client accounts that are managed using the same investment strategy participate in investment opportunities generally based on available cash as a percentage of total assets under management in the account, subject to certain considerations and clients respective investment guidelines and restrictions. The Portfolio Managers compensation is generally not based on, or linked to, the specific performance of a particular client or the level of assets under management.
(a)(3) Description of Portfolio Manager Compensation Structure (information as of December 31, 2018)
The Portfolio Manager receives a fixed salary, plus a discretionary bonus that is determined based on a variety of factors, including the Portfolio Managers contribution to the overall growth of the Sub-Adviser and its affiliates, leadership and other contributions to the Sub-Adviser. The Portfolio Managers compensation is not specifically linked to the performance of the Registrant or any other particular client account, or the value of the assets held in the portfolio of the Registrant or any other particular client account.
(a)(4) Dollar Range of Equity Securities in Registrant Beneficially Owned by Portfolio Manager (information as of December 31, 2018)
The following table shows the dollar range of the Registrants shares owned beneficially and of record by the Portfolio Manager, including investments by his immediate family members sharing the same household and amounts invested through any retirement and deferred compensation plans.
Dollar Range of Registrants Shares Beneficially Owned
Over $1,000,000
(b) Not Applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders. There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrants Board implemented after the Registrant last provided disclosure in response to this Item.
Item 11. Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrants Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control over Financial Reporting. There was no change in the Registrants internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting.
Item 12. Exhibits. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
(a) If the registrant is a closed-end management investment company, provide the following dollar amounts of income and fees/compensation related to the securities lending activities of the registrant during its most recent fiscal year:
(1) Gross income from securities lending activities;
(2) All fees and/or compensation for each of the following securities lending activities and related services: any share of revenue generated by the securities lending program paid to the securities lending agent(s) (revenue split); fees paid for cash collateral management services (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split; administrative fees that are not included in the revenue split; fees for indemnification that are not included in the revenue split; rebates paid to boiTowers; and any other fees relating to the securities lending program that are not included in the revenue split, including a description of those other fees;
(3) The aggregate fees/compensation disclosed pursuant to paragraph (2); and
(4) Net income from securities lending activities (i.e., the dollar amount in paragraph (1) minus the dollar amount in paragraph (3)).
Instruction to paragraph (a)
If a fee for a service is included in the revenue split, state that the fee is included in the revenue split.
(b) If the registrant is a closed-end management investment company, describe the services provided to the registrant by the securities lending agent in the registrants most recent fiscal year.
Item 13. Exhibits. Attached hereto.
(a)(1) The Registrants code of ethics pursuant to Item 2 of Form N-CSR.
(a)(2) Separate certifications by the Registrants Principal Executive Officer and Principal Financial Officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.
(a)(3) Not applicable
(b) Separate certifications by the Registrants Principal Executive Officer and Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPROTT FOCUS TRUST, INC. | ||
By: | /s/ Thomas W. Ulrich | |
Thomas W. Ulrich | ||
President |
Date: March 12, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SPROTT FOCUS TRUST, INC. | SPROTT FOCUS TRUST, INC. | |||||||
By: | /s/ Thomas W. Ulrich |
By: | /s/ Varinder Bhathal | |||||
Thomas W. Ulrich | Varinder Bhathal | |||||||
(Principal Executive Officer) | (Principal Financial Officer) | |||||||
Date: March 12, 2019 | Date: March 13, 2019 |