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January 02, 2014

2014 Kicks Off With a Shift to Value

Northlake’s models start 2014 with a switch from growth to value in the Style model. This change occurs after three months on the growth signal during which growth outperformed value by a little less than 1%. As a result of this fresh signal, all client positions in the Russell 1000 Growth (IWF) were sold and proceeds were reinvested in the Russell 1000 Value (IWD). The Market Cap model saw no change to is Mid Cap signal, now beginnings its second month. The S&P 400 Mid Cap (MDY) will be held for at least another month.

Looking below the hood, the shift to value was it a little more than it seemed. I have explained several times recently that the signals from both models have been on the weak side as far as favoring one theme over another. What this really means is that the “score” which determines the recommendation is right on the border between two possible signals. This has been the case for much of this year and reflects two factors. First, there has been slow but steady growth in the U.S. economy. Second, the stock market rose steadily with little volatility and pretty much all sectors of the market rose in unison – the proverbial rising tide lifts all boats.

This environment for the economy and stock market makes it difficult for the models to provide excess return. However, it also means the models returns will closely match the market. In a year in which the stock market rises 30% that is certainly an acceptable outcome. In fact, during 2013, each model produced a return almost exactly in line with the gain in the benchmark U.S. stock index, the S&P 500.

Should volatility in economic growth or the stock market pick up, it is likely that variation in returns among growth and value and small, mid, and large cap stocks will also pick up. Northlake’s Market Cap and Style models have a good long-term record of capturing excess return in these environments, so as economic and market conditions normalize, Northlake’s models should reassert themselves and probably see less volatility in the signals on a month-to-month basis.

MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.

Posted by Steve Birenberg at January 2, 2014 01:24 PM in Models