I was recently asked to comment for an article on a small, top-performing mutual fund – Redwood Global Small Cap. While the article included a couple of my comments, there was no room for some of the more striking statistics I found when doing a quick review of the fund’s filings. But the quick review I did could also serve as a guide to where to start when beginning to research a product for the first time. And such a review can help to ground investors that are seeing dollar signs after a hot run.
Too many people often overlook very basic steps. In the case of a fund, particularly where it is managed by a third party, reviewing the information available in the public domain is easy to forget about – but it’s a critical first step. For Ontario, you can use the OSC’s Registration Check. For the rest of Canada, the CSA now maintains a national database for use by the public. The goal here is to verify the status and category of registration along with any terms, conditions or constraints on licensing.
Next stop is www.sedar.com which is a database of regulatory filings for mutual funds and publically-traded companies. You can find the full slate of regulatory filings for this fund on the SEDAR website. Even a preliminary, surface review should include a quick scan of a fund’s financial statements, management report on fund performance (MRFP), the prospectus and annual information form (AIF).
I won’t recount a full review but here are a few tidbits I stumbled on when taking a quick look through a couple of documents.
To buy or not to buy
I have not come close to doing proper due diligence on this firm or fund. Accordingly, neither I nor our firm has an opinion of the fund. Given that this fund is very hedge-fund-like, it requires investors to do a lot of homework to assess the quality of this fund and its suitability for each investor’s particular circumstances.
One good sign revealed in the Globe & Mail article is the firm’s stated intention to cap the fund’s size at no more than $50 to $60 million. The high turnover combined with the fund’s focus on small and micro cap stocks requires a small asset base to have a hope of continuing the fund’s apparent strategy. Even then, however, triple-digit performance figures are simply not sustainable over any meaningful period of time. And time will tell if the firm actually caps this fund at the stated asset level. Plus, the wording around the fund’s performance fee is not as tight or complete as I’d like.
Whatever the case, I hope that investors don’t get lured into this volatile fund at the wrong time and for the wrong reasons (i.e. with unrealistic expectations of repeating its brief record). Canadians’ investing history is filled with such examples that have ended badly for investors. Don’t be another dubious entry in the investing history books.