Current Fund Commentary - Quarter 3, 2011

The Redwood Global Small Cap fund underwent another challenging quarter down 25% versus our benchmark (80% TSX Small Cap Index & 20% MSCI Global Small Cap Index) down 20.24%. Slower than expected growth in the US paired with continued uncertainty in European sovereign debt led to severe risk aversion during the quarter. Small caps were hit hardest with the TSX Venture underperforming the TSX Composite by over 100% thus far year-to-date. Further, volatility (as measured by the VIX Index) had its biggest quarterly increase in  history during Q3 and the S&P retreated the most since 2008.

The funds underperformance during the quarter was due to our overweight position in energy & mining/materials. Commodity prices declined significantly despite fundamental demand remaining strong. China, which represents +30% of global copper demand is showing signs of restocking following nearly 9 month of destocking. Cancelled warrants at the LME (which represent buying demand) hit a 3-yr high the first week of October. The major disconnect between  commodity prices and fundamentals has been due to an increase in margin requirements for futures contracts and unwinding of speculative positions as investment funds prepare for tax loss selling season and possible redemptions.

Going into the fourth quarter we are focussing the portfolio in our top twenty holdings we believe have the strongest fundamentals. This will provide the best total return while mitigating potential downside risk. We will hold 30% cash to opportunistically redeploy in our best names should we see a meaningful and sustainable return to risk appetite indicated by renewed buying in income equities and large caps. In addition, we will continue to short companies opportunistically as we have done successfully throughout Q3.