A Word From The Advisor
Staying Power

Whether the equity market is going up or down, it will always be full of short-term distractions – the direction of interest rates, inflation, commodity prices, and geopolitical events, to name but a few that create market volatility. It is difficult at times to look beyond a short-term horizon and remain comfortable holding your equity investments for a minimum period of several years, as you ride out the inevitable bumps that will occur during that time period. The challenge for us at Oakwood Capital Management LLC is to look beyond the noise and short-term distractions and continue to find investment ideas for our clients that have staying power, but also remain ready to respond to any fundamental change in an individual investment or industry outlook.

Our equity investment approach begins with an understanding that it may take years for a company to create global distribution networks, build infrastructure and forge brand identities. We continuously evaluate management’s strategies and execution and their potential impact on a company’s long-term profitability. Our view of each company as an ongoing business, rather than as a current stock price or a quarterly earnings projection, keeps us focused on promising long-term investment opportunities. This long-term view also has positive effects on a fixed-income portfolio. We seek to give our clients a relatively high and stable long-term income stream, rather than merely trying to generate returns by capturing short-term price fluctuations.

We buy stocks of companies that we believe are well-managed, that are growing, and that generate above-average free cash flow on our investment, at reasonable prices, and hold them for the long term. We ask, “Where will this company be in three to five years?” instead of “Where will this stock be in three to six months?” It may seem to be oversimplifying to say “Look for good long-term investments”, but the basics are often overlooked when investors and markets are caught up with short-term distractions.

What follows are three investment themes that Oakwood believes in for the long term. We have identified the underlying industry, sector and economic trends that we believe will generate respectable returns for our clients over time:

Information Technology Sector

Everyone, it seems, is going wireless. Statistics from the wireless world seem almost unbelievable for those of us not working in the field – like the billion cell phones shipped in the past two years, or the projection that the US market for all wireless services and products is expected to be $190 billion by 2007, up from $145 billion in 2004.

Keep in mind that the US consumer wireless industry is rapidly approaching key turning points, with subscriber growth and continued voice average revenue per user (ARPU) slowing, with total voice revenue expected to decline in the 2008-2009 timeframe. In this environment, the next wave of explosive growth will be fueled by continued second generation (2G) internet capabilities for cell phones, like messaging, e-mailing and transmitting pictures; and third generation (3G) services like video on demand. Effectively mapping internet content to mobile wireless devices requires not only new technologies and standards, but also innovative solutions that minimize cost and maximize efficiency to the benefit of both content providers and consumers. We have identified companies that innovate and lead in the areas of:

Network and Service Technologies

• Equipment providers that produce the devices and the infrastructure to support wireless data networking.
  
  
• Application platform solutions from vendors that contribute the middleware infrastructure such as wireless application protocol (WAP) gateways.
  
  
• Leading wireless and mobile communications companies that develop the wireless application protocol for transmitting and presenting wireless information and telephony services on mobile handheld devices.

Energy Sector

All of Oakwood’s investment professionals have successful results investing in the Energy sector, and positioning portfolios for opportunities during times of great change. Regardless of the volatility in energy prices, we see a long term secular bull market in energy stocks. The underlying thesis that drives our investment approach in the energy sector is the ongoing major transition from the current cheap fossil resource-intensive global economy to a more expensive energy environment where virtually every business and consumer purchase, and investment decision is driven by its energy efficiency. The increasing scarcity of oil, gas, and other fossil resource mineral fuels will necessitate an economic restructuring as we transition into a diminishing resource environment. This transition, already underway, will continue over the next decade or two, and will create profitable opportunities for the perceptive investor and losses for anyone who does not anticipate its impacts and who fails to change their portfolios.

The pressures of supply and demand are in force in magnitude for both oil and gas production. Global oil and natural gas in the US are already in very tight supply versus demand worldwide, with production and refining capacity straining to meet demand. This, along with geopolitical uncertainty and reductions in production – as in Nigeria, for example - is leading to increased price volatility in oil and natural gas, overlaid on a secular increase in prices over the next ten years.

Approximately 40% of global energy consumption is petroleum. About 70% of existing oil production is from oil fields discovered 25 or more years ago. With 4% to 5% of world crude production being depleted every year, an additional 2% in crude production must be found and developed to meet growth in global demand. In 2005, the world consumed 6 barrels of oil for every one discovered, one of the signs that world oil production is nearing its peak while demand continues to climb. We focus on identifying those companies that will succeed in this challenging environment, and on owning energy assets, in safe countries, which we believe will ultimately increase in value.

Healthcare Sector

The aging of the US population brings with it an increase in demand for healthcare related products and services. A recent report released by the federal government estimates that within a decade 1 out of every 5 dollars spent in the US economy will go for health care, with annual spending consistently growing faster than the overall economy. The nation will spend $4 trillion on health care — or about $12,320 per person annually — by 2015. Increased spending on hospital care, home health services, drugs and public health programs will help push total health care spending from its current 16.2% of the Gross Domestic Product (GDP) to 20% in 2015.

While the demand for healthcare products and services is on the rise, our society’s cultural norms are such that we cannot accept the notion of an entity making a profit from someone’s misfortune of ill health. Because of this, there will always be pressure on profit margins in this sector. While healthcare companies can and must make a reasonable profit in the accounting sense, society will not accept the notion of a healthcare provider making excessive profits. That being said, adherence to our strict investment discipline of identifying companies where the stock is priced at an attractive discount to the firm’s long-term intrinsic value is crucial to long-term success in this sector. There will be opportunities to make money in the healthcare sector. The key is to remain patient in order to obtain the price we are willing to pay for the stock.

We are focused on these sectors for the “long haul”, and will remain diligent in our search for the highest quality companies within these and other areas that we feel will provide our clients with solid, low risk long term investment results. We look forward to continuing to serve your investment needs.