March 2013

by Genevieve Roch-Decter

Large cap equities outperformed small cap equities in the first quarter as risk appetite remained subdued.  During Q1, the S&P/TSX Composite index was up 3.34% while the S&P/TSX Small Cap index was up 0.66% and the S&P/TSX Venture index was down 9.87%.  The higher weighting to Energy & Materials in the small cap indices explains some of the underperformance as both sectors we’re negative in Q1.

The Redwood Global Small Cap Fund was down -5.06% vs. the benchmark +2.63% (80% the S&P/TSX Small Cap Index & 20% the MSCI World Small Cap Index).

The Fund trailed the benchmark due to being underweight in the Financial sector which comprised of REITS & Asset Managers.  As we enter the Q2 the Fund has increased Financials weighting to equal benchmark weight (~12%) and decreased Material & Energy exposure to underweight (from 50% to 29%). The fund has added American Hotel Income Properties which pays an 8.3% yield and Fiera Capital which pays a 3.8% yield.

Highlight positions during the quarter include; Guestlogix (GXI) (largest weight holding) up 23%, DHX Media (DHX) up 48%, Enterprise Group (E ) up 50%, Fiera Capital up 13.7% and Difference Capital (DCF) up 11.7%.

We believe that small cap Energy & Material sectors will continue to underperform (especially gold given the Fund liquidation that is ongoing) and as such we have moved to an underweight position. We believe lower beta dividend paying small cap equities will outperform. As such over 40% of the fund is invested in these, generating ~3% running yield on the portfolio.