Current Fund Commentary - Quarter 3, 2011

Concerns regarding the health of the European banks exposed to the deteriorating Greek debt persisted in Q3  and early indications that China could be headed for an economic slowdown compounded the fears of a looming U.S. recession which resulted in the steepest drop for equity markets since Q1/09 resulting in a decline of the S&P/TSX of 12.6%. The Redwood Diversified Equity Fund declined 15.7% underperforming the benchmark which was down 9.1% in the quarter. The underperformance was primarily attributed to 27% exposure in weighting in energy related companies as the oil price declined over 18% during the quarter.

Despite the drop in the oil price two energy positions had considerable outperformance during the quarter, Trilogy Energy Corp,, up 13.2% and Second Wave Petroleum up 18.2% (which we sold in mid- July). Our position in New Gold managed to gain 9% despite Gold selling off late in September. Two short sale trades from late September each earned a 15% total return (First Quantum and Detour Gold).

We are cautiously optimistic for a strong finish to the year and into 2012 as European counties have indicated financial support for their domestic banks. Our holding concentrations remain levered to energy and strong yielding companies and the fund has increased its cash position to roughly 6% thus giving us some flexibility to take advantage of investment opportunities that may arise  during this volatile time in the markets.