Northlake’s Style model shifted from favoring growth to a neutral reading for December.  As a result, one half of client positions in the Russell 1000 Growth (IWF) were sold and the proceeds were reinvested into the Russell 1000 Value (IWD).  The Market Cap model is still recommending mid cap for December.  Therefore, client positions in the S&P 400 Mid Cap (MDY) will be held for at least another month.

The shift in the Style model represents the first change in 13 months.  Since the growth signal was initiated on 11/1/14, the model has performed exceptionally well.  IWF gained 7.6% against a loss of -1.87% for the Russell 1000 Value (IWD), the Style model’s primary alternative to IWF.  The S&P 500 gained 3.1% while the growth signal was in place.  This is exactly how the models are supposed to work — invest in the best performing themes relative to direct alternatives and beat the benchmark market index.  Given that 11/1/14 was the first month using the updated models, this result is encouraging.

We mentioned last month that the Style model was moving toward value and away from growth.  In addition to updating the factors and weightings that drive each model, the 2014 update also created a “neutral” recommendation for the Style model.  Previously, it was only growth or value.  Our analysis of growth vs. value over long period of times indicated that neutral was a value-added recommendation for the Style model.  The shift that took place this month is mostly reflective of larger changes in the underlying indicators that favored value last month.  The final model reading and recommendation represent a two month average in order to reduce volatility in the signals as we are shooting for longer term performance.  Presently, six Style indicators favor value and eight favor growth with both internal and external factors having a roughly even split.

The Market Cap model remains pretty firmly in mid cap territory with a slight bias toward small cap.  There are sixteen indicators that comprise the Market Cap model.  Presently, eight favor large cap and eight favor small cap.  In addition, the internal and external indicators are also split at four each for small and large cap.  As reminder, the individual indicators in the Market Cap model recommend only small or large cap and a split decision cumulatively defaults to a mid cap recommendation.  The Market Cap model has performed fairly well this year, gaining about 1% more than the S&P 500.  The model has been on a mid cap signal all year except for June and July when large cap was favored.

MDY, IWD, 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.