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November 04, 2014

Tweaking the Models and Switching from Value to Growth

Over the past couple of months I have been working with Ned Davis Research on updates to Northlake’s Market Cap and Style models. Ned Davis originally developed these models about 20 years ago and I began using them around 1999. During this time, I have periodically worked with Ned Davis to analyze the models.

The update to the models has led to some changes in the underlying factors and the potential outputs. However, the basic theory behind the models is unchanged. The models are designed to capture incremental returns by investing in the best performing themes based on company size (Market Cap) and type of company (Style). While the models have been updated, I consider the current changes to be incremental.

The goal of the current updates is to improve the accuracy of the model signals and enhance performance in client accounts. Beyond using some new inputs, the biggest change is that the Style model will now have three possible outcomes: growth, value, or neutral. Neutral will lead to portfolio positons in value being evenly divided between the growth and value ETFs.

I will provide a lengthier update on the changes in the models later this month. I will be able to see the old models through March to help keep a check on how the changes are working out.

For November, the Style model has shifted from value to growth. The Market Cap model is still recommending large cap. As a result of the new signals, client positions in the Russell 1000 Value (IWD) have been sold and proceeds reinvested in the Russell 1000 Growth (IWF). With no change in the Market Cap model, client holdings in the S&P 500 (SPY) will be held.

SPY and IWF 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 November 4, 2014 10:14 AM in Models