When Jonathan Clapham, president and founder of investment fund company Redwood Asset Management Inc., decided to take the plunge into the hotly competitive mutual fund arena, he knew he had to stand apart from the crowd and offer an identifiable advantage.

So, Clapham, previously a financial advisor at BMO Nesbitt Burns Inc. as well as a former vice president of sales at Clarington Funds Inc. (now IA Clarington Invest-ments Inc.), spent a year researching the market and talking to advisors about what they and their clients needed and wanted in a fund family.

Toronto-based Redwood was incorporated in December 2002. Over the next year and a half, it launched a small family of funds managed by third-party managers. The funds are each restricted to a maximum of $150 million in assets. The limit enables investment in some less liquid but potentially more promising small-cap opportunities, Clapham says. Unlike many funds, which start out with superior performance but become index followers as they grow so large that they are limited to larger, more liquid companies, Redwood funds avoid the disadvantages of unwieldy size.

“Capping the funds is a good sign, and something I like to see,” says Dan Hallett, president of Windsor, Ont.-based fund analyst Hallett & Associates Inc. “The funds are not allowed to get so big that it hampers performance.”

In addition, the fund’s portfolio managers have the freedom to engage in short-selling strategies to varying degrees, depending on the fund, or to hold as much cash as managers consider prudent.

“Advisors are looking for investments for clients that are not correlated to the stock market,” Clapham says. “They want statement stability. If a fund can act as a stabilizer to an overall client portfolio, it can limit statement shock in volatile markets. Our goal is to provide a positive return every month, regardless of market fluctuations.”

Redwood has two subadvisors, each managing two funds. Andrew McCreath, president of Toronto-based Waterfall Investments Inc. , manages both the $4.5-million Redwood Long/Short Fund and the $19-million Redwood Long/Short Conservative Fund.

McCreath was a founding share-holder of Synergy Asset Management Inc. of Toronto and formerly manager of Synergy Canadian Growth Fund.

The two Redwood funds managed by McCreath are sold by offering memorandum and require a minimum initial investment of $150,000 unless investors are accredited, in which case the minimum is $5,000. The funds can freely engage in short-selling and are considered “alternative strategy” funds.

McCreath took over Redwood Long/Short Fund last October, after the previous manager, Gene Vollendorf of Calgary-based Savoy Capital Management Ltd., resigned from both Savoy and the Redwood fund. On the larger Redwood Long/Short Conservative Fund, McCreath achieved a one-year return of about 6% as of April 30, which lags the S&P/
TSX composite’s return of 11.4%.

The larger two funds in the family are the $23-million Redwood Diversified Equity Fund and the $30-million Redwood Diversified Income Fund, both managed by Michael Decter, a Harvard-trained economist and president of Lawrence Decter Investment Counsel Inc. in Toronto.

Decter was a deputy minister of health for Ontario under Bob Rae’s NDP government in the early 1990s and a cabinet secretary for the NDP government in Manitoba under Howard Pawley in the early 1980s. Decter is the author of four books on finance or health care; among the former are Million Dollar Strategy and The DRIP Strategy: Building your wealth one share at a time with dividend reinvestment plans.

Decter’s funds are sold by regular prospectus and he may short-sell securities equivalent to 20% of his fund’s asset value. Minimum investment is $5,000.

Redwood Diversified Equity returned 10.9% in the first quarter of 2007 (20.2% in 2006). Redwood Diversified Income returned 5.3% in the first quarter (8% in 2006).

“Our managers can enhance returns by shorting or going to cash when conditions dictate,” Clapham says. “They have the ability and the weapons to make a return, no matter what the market is doing, and that’s what Redwood is about. People are looking for downside protection and reduced volatility, and more flexibility than you find in most prospectus-sold funds.”

Clapham is keeping costs low in a variety of ways. While Redwood is private and does not disclose financial results, he says, it is already profitable because of his tight-fisted approach.

@page_break@His small sales team is composed of only himself and two others, and they are marketing “one broker at a time to the right people” rather than mass marketing through the media or blanket e-mails. Typically, contact is made with individually identified advi-sors at breakfast and lunch meetings rather than through large presentations to an entire firm.

About 320 advisors currently sell Redwood funds. Clapham would like to see that client base grow to about 600 brokers, each with $1 million of client assets at Redwood.

Costs are also kept low through weekly rather than daily pricing and trading of the fund units, and by not registering the funds for distribution in every province. Decter’s two funds, for example, are not available in Quebec, which saves on translation costs. “We are small and tight,” Clap-ham says. “We don’t want 40,000 brokers selling our funds, nor do we want to be the next CI Investments Inc.”

The fund family originally contained Redwood Energy Fund, but that was shut down after five months. The decision was made to focus on more flexible and broad-based funds.

“The energy market did great for awhile, but we were concerned we were catching the top of the market,” Clapham says. “Where do you go when the fun’s over? Andrew and Michael can both move their funds into energy when they see an opportunity. They can go into any sector any time, as well as large-cap, small-cap or short.”

The funds charge a 2.25% management fee, and give managers a bonus equivalent to 20% of the amount by which they beat the relevant market benchmark. Such incentives reward managers for performance rather than for bringing in huge assets, says Hallett, and ensures them competitive compensation even if the funds stay small. IE