Equity Market Strategy
Global Opportunities

As we enter 2007, we are positive on the outlook for global equities. We may be entering the latter stage of the US equity bull market, which is in its fourth year, but history tells us these time periods can be very profitable for shareholders. When a significant buyer of stock is the corporate buyout sector itself, future returns tend to be good.

Liquidity remains the story behind 2006’s strong market and the prospects for 2007. The increasing utilization of financial leverage and record corporate cash flow are supplying an abundance of liquidity. International equities are riding the liquidity wave, too. Earnings growth around the globe is strong, valuations remain near or better than longer-term averages, and the cost of capital is quite attractive. Europe’s economy is exhibiting the benefits of long-term restructuring through stronger domestic demand. Japan’s domestic growth is uneven, but we see continued strong growth in China and other emerging markets.

Investors have been witness to areas of market and global economic stability and growth, but this disguises huge underlying forces that are reshaping the world in vast ways. These include booming commodity prices as the world uses up finite resources, and the resulting colossal transfer of wealth to resource-rich nations (accompanied by a commensurate movement of capital to developed nations). Consuming nations are jockeying for control of scarce resources both economically and militarily.

On the domestic side, with a shift in Congress, aside from some early successes, we anticipate gridlock in Washington, DC in 2007 and 2008. Until the 2008 elections, we expect the current federal income tax brackets and qualified dividend and capital gains tax brackets to remain essentially unchanged. We expect limited economic impact beyond an increase in minimum wage, and removal of subsidies for oil and gas. Also, there is a possibility that certain industries, such as healthcare and drugs, may be affected by initiatives from the new Congress. We have lightened up our exposure to these industries.

A central process in Oakwood’s equity strategies has been identifying and investing in undervalued, high quality multinational companies and non-US ADRs. In addition to their excellent investment characteristics, these Oakwood companies with large non-dollar operations help insulate client portfolios from the falling dollar. We recently added a premier beverage company, trading at a ten-year low P/E ratio with profound international franchise strength, strong and growing free cash flow, strong dividend growth and frequent share buybacks.

Another international company that we hold in client portfolios was originally the wireless side of Telmex, the incumbent telephone operator in Mexico. It is the largest wireless operator in Latin America, with more than 70% of the wireless market in Mexico, in addition to millions of wireless customers in the US and Central America. It has positive free cash flow and is internally funding its growth. This company has experience dealing with the vagaries of the Latin American market, and introduced the first prepaid phone system, which has been the key to expanding wireless telephone service in many markets.

A world class pharmaceutical company based in Switzerland provides another component of client portfolios. In addition to manufacturing and marketing a variety of branded pharmaceutical, generic and consumer-related products, it has strong franchises in oncology and cardiovascular products, among others. Recent acquisitions should help to more than double its presence in generic drugs and add new growth platforms, such as vaccines. This high quality firm follows the European tradition of conservative financial management, with little debt and ample cash reserves. It is one of two AAA-rated nonfinancial firms in Europe, and generates free cash flow that exceeds 15% of sales.

While our conservative approach of owning premier companies with positive free cash flow, strong returns on capital, increasing dividends and healthy earnings growth that trade at attractive valuations will not always nominally outperform a high flying market, we believe it almost always outperforms on a risk-adjusted basis — and it helps our clients sleep well knowing they are well protected from downside volatility.