How Stock Portfolios Create Excess Return
Contributing Factor
Impact on
Portfolio Return
Importance to
Northlake
Market Timing
Modest
Low
Strategic Themes
Large
Very Important
Security Selection
Modest
Low
Northlake’s equity investment strategy is focused on strategic themes --- the factor which has the greatest
influence on portfolio returns. Most money managers focus on security selection or market timing.
Stock Market Investors Face Many Choices...
Active or Passive?
Large or Small Cap?
Growth or Value?
Stocks or Funds?
A Better Way...
Northlake’s ETF Plus Equity Portfolio
Northlake Capital Management is a full-service investment management firm
featuring ETF Plus, a unique strategy for stock market investing. ETF Plus is
designed to meet the challenges of the stock market with a straightforward investment
philosophy: simplify, diversify, and control costs.
ETF Plus Portfolio
Market Cap
Indices
Style Indices
Core Investments
Special
Situations
Core Investments for Long-Term Growth
+
Satellite Investments for Excess Return
What ETF Plus Does For Portfolios
Northlake Capital Management, LLC
Portfolio Component
Contribution to Strategy
Core Market Investments
Customize your portfolio based upon your unique
goals and objectives
Market Capitalization
Invest for excess return using a back-tested strategy
for selecting Large Cap, Mid Cap, or Small Cap
stocks
Style
Invest for excess return using a back-tested strategy
for selecting growth or value stocks
Special Situations
Purchase carefully researched, undervalued stocks
creating an opportunity for excess return independent
of the major market indices
Northlake actively manages ETFs using disciplined strategies to take advantage of developing stock
market themes (value vs. growth and small cap vs. large cap). Select Special Situation stocks increase
portfolio potential.
Exchange Traded Funds:
Differentiating Northlake Capital Management
 ETFs are publicly traded securities designed to perfectly mimic the
performance of a target index (e.g. the S&P 500, Small Cap stocks, or Value
stocks)
 ETF’s are a flexible tool enabling new stock market strategies
 Over 180 ETFs are available that replicate major market indices, specific market
capitalizations, equity styles (growth or value), economic sectors and industries,
and international markets
 According to the Investment Company Institute more than $150 billion was
invested in ETFs at the end of 2003
 ETFs provide clear benefits for investors




ETFs provide broad exposure and diversification
A handful of ETFs shares the profile of a portfolio of 40 to 50 stocks
ETFs allow investors to implement strategies more directly and more simply
ETFs offer the same upside as individual stocks without the individual company
risk
ETFs are “a better way to invest” --- employing a portfolio of actively managed ETFs provides investors
with the same upside potential as individual stocks, risk reduction through diversification, and exposure to
key segments of the market
Northlake’s ETF Plus Strategy
for Fully Diversified Stock Portfolios
Excess Return
Long-Term Growth
Core Investments
Market Cap
Selection of Market Index ETFs
(e.g. S&P 500, NASDAQ,
International) customized for
each client’s unique goals,
objectives, and tolerance for
risk
Large Cap
Vs.
Mid Cap
Style
Growth
Vs.
Value
Vs.
Special
Situations
Critically Analyzed
Underfollowed
Select Trading Positions
Risk Management
Small Cap
Core Market Indices
Top Cap Gets Allocation
Top Style Gets Allocation
Individual Equities
Investor Specific
Monthly Model
Monthly Model
Held To Target Price
Exchange Traded Funds
Exchange Traded Funds
Exchange Traded Funds
Rebalance As Needed
ETF Plus is a comprehensive solution for managing equity portfolios. ETF Plus is fully integrated and
flexible -- follow Northlake’s recommendations, adjust the weightings to best match your goals and
objectives, and include Core Investments customized to your tolerance for risk.
Northlake’s ETF Plus Strategy
for Aggressive Stock Portfolios
ETF Plus Equity Portfolio
Market Cap
Large Cap
Vs.
Mid Cap
Style
Growth
Vs.
Value
Vs.
Special Situations
Critically Analyzed
Underfollowed
Select Trading Positions
Risk Management
Small Cap
Top Cap Gets Allocation
Top Style Gets Allocation
Individual Equities
Monthly Model
Monthly Model
Held To Target Price
Exchange Traded Funds
Exchange Traded Funds
Rebalance As Needed
Rebalanced Quarterly
ETF Plus for Aggressive Portfolios invests only in strategies designed to beat the market --- Northlake’s
Back-Tested Models for Market Capitalization and Style and Select Special Situation Stocks off the
radar of Wall Street and at odds with conventional wisdom
Creating ETF Plus:
Market Capitalization Model
Monthly Data 2/28/1981 - 7/31/2004 (Log Scale)
Three-Way Capitalization Model
2911
2310
1832
1454
1153
915
726
576
457
362
287
228
181
143
114
90
72
2911
2310
1832
1454
1153
915
726
576
457
362
287
228
181
143
114
90
72
Lg-Cap Mid-CapSml-Cap %
When Model
Reading Is:
GPA
GPA
GPA ofTime
Above 55%
5. 9
17. 4
23. 8
27. 4
*Between 35% & 55% 7. 8
11. 4
5. 1
30. 3
13. 4
10. 0
3. 2
42. 2
35% and Below
Buy/Hold
9. 6
12. 4
9. 1
100. 0
As of 6/30/2004:
Model Equity Line (
) = $2929
Gain Per Annum = 15.6%
Benchmark Equity Line (
) = $976
Gain Per Annum = 10.3%
(2/28/1981 = $100)
Large
Northlake’s ETF Plus equity
portfolios purchase a 20% position
in an ETF that tracks the favored
capitalization. The position is held
until the model favors a new style.
The average holding period for the
top rated capitalization has been
slightly over five months since
inception in 1981.
Mid
2004
2003
2002
2001
2000
1999
1998
1996
1997
1995
1994
1993
1992
1991
1990
1988
1989
1987
1986
1985
1984
1983
1982
Small
(BHGGG_CAP3)
Each month, Northlake’s Market
Capitalization model selects a
favored capitalization based on a
model developed by Ned Davis
Research and adapted for
Northlake.
© Copyright 2004 Ned Davis Research, Inc. Further distribution prohibited without prior permission.
All Rights Reserved. NDR Disclaimer. For data vendor disclaimers refer to www.ndr.com/vendorinfo.
Since 2/28/81, the Northlake’s Capitalization Model has produced a CAGR of 15.6% versus 10.3% for a
benchmark equally weighted among the leading large, mid, and small cap indices. Excluding transaction costs,
$100 invested in the model at inception would be worth $2,929 as of 6/30/04. A $100 investment in the equally
weighted index would be worth $976.
Creating ETF Plus:
Style Model – Growth vs. Value
Monthly Data 2/29/1980 - 7/31/2004 (Log Scale)
Two-Way Style Model
1918
1571
1287
1054
863
707
579
474
388
318
260
213
175
143
117
96
79
1918
1571
1287
1054
863
707
579
474
388
318
As of 6/30/2004:
260
Model Equity Line (
) = $1865
213
Gain Per Annum = 12.8%
175
Benchmark Equity Line (
) = $523 143
117
Gain Per Annum = 7.1%
96
= $100)
(2/29/1980
79
When Model Growth Value
%
Reading Is:
GPA
GPA ofTime
Above 45% 22. 50 14. 3
41. 8
* Below 45% 1. 1
6. 3
58. 2
Buy/Hold
9. 6
9. 6
100. 0
Growth
Northlake’s ETF Plus equity
portfolios purchase a 20% position
in an ETF that tracks the favored
style, holding the position until the
model favors a new style.
The average holding period for the
top rated capitalization has been
seven months since inception in
1980.
2004
2003
2002
2001
2000
1999
1998
1997
1996
1994
1995
1993
1992
1991
1990
1989
1987
1988
1986
1985
1984
1983
1982
1981
Value
(BHGGG_STYLE3)
Each month, Northlake’s Style
model selects either growth or value
stocks as a favored class based on a
model developed by Ned Davis
Research and adapted for
Northlake.
© Copyright 2004 Ned Davis Research, Inc. Further distribution prohibited without prior permission.
All Rights Reserved. NDR Disclaimer. For data vendor disclaimers refer to www.ndr.com/vendorinfo.
Since 2/29/80, Northlake’s Style Model has produced a CAGR of 12.8% versus 7.1% for a benchmark equally
weighted between the growth and style indices. Excluding transaction and administrative costs, $100 invested in
the model at inception would be worth $1,865 as of 6/30/04. A $100 investment in the equally weighted index
would be worth $523.
Why ETF Plus Works
Northlake’s Strategies Offer Potential for High Returns while
Reducing Risk and Controlling Costs
 Core Market Investments Allow Investors to Customize their Portfolio to
Match their own Tolerance for Risk
 Market Capitalization and Style ETFs offer Back-Tested Upside while
Eliminating Security Selection Risk
 Special Situation Stocks Provide Additional Upside
 Only the Manager’s Best Ideas: Carefully Analyzed and Deeply Researched
 Stop Loss Orders and Option Hedges Control Downside
 Reduced Overhead Costs are Passed Through to Clients
 No Big Research Department to Subsidize
 Simple Trading Strategies Reduce Custodial and Commission Costs