Equity Market Strategy
The End of the Year Could Bring Opportunities

While significant challenges exist in the current mar-ket, we believe that, on balance, the outlook for stocks for the remainder of 2005 and into 2006 is moderately positive. Estimates of growth in corporate earnings for 2005 by Wall Street strategists have risen from the start of the year to over 10%, with the actual recent earnings growth averaging closer to 13.5% so far this year. Even in the wake of higher commodity prices and the damages from natural disasters, Oakwood’s analysis of corporate earnings leads us to estimate that calendar year 2005 earnings growth may well exceed current Wall Street estimates. Across all Oakwood equity strategies, the average weighted earnings growth rate of our stocks is decidedly stronger than the broad market, represented by the S&P 500.

The multiplier effects on the billions that will be spent on rebuilding our energy infrastructure and the Gulf Coast communities will have a very strong and positive impact on growth in corporate revenues and profits in 2006 and 2007. Earnings forecasts by Wall Street strategists for 2006 have increased in recent months, and our expectation would be for further increases in earnings forecasts along with potential positive earnings surprises. A caveat to these expectations is the rate of inflation. Strategists are starting to write about the possibility of “stagflation” defined as the environment of slower growth and rising inflation. While the current environment of rapidly rising prices in raw materials, oil and gas may negatively impact corporate profitability expectations over the next twelve months, we believe earnings will increase over time. We will continue to monitor these factors to determine appropriate portfolio adjustments.

Another positive development is that the rate of growth in dividend payments is greater than the rate of growth in corporate earnings. Last year, dividends paid by S&P 500 index companies grew by 12% over the prior year, and so far this year, dividend payments have increased by over 16%. In most Oakwood equity strategies, our client portfolios enjoy dividend income well in excess of the dividend income of the S&P 500 Index. This income advantage will provide a cushion should we experience some short term volatility in the market and will contribute to clients’ total return.

The important theme for all holdings in Oakwood’s equity portfolios is that they have the following characteristics:

• Positive cash flow;
• Strong returns on capital;
• Healthy balance sheets;
• Increasing dividends;
• Good earnings growth prospects, and;
• Trade at attractive valuations.

Certainly, the upcoming earnings reporting season promises to be filled with many earnings surprises and will cause some market volatility. In periods of market volatility, high quality companies that meet all of Oakwood’s stringent investment criteria but have been overpriced may now be trading at valuations suitable for inclusion in Oakwood client portfolios. We make volatility our friend by using it to add excellent companies to our portfolios, when short term issues lower their prices.

Rising interest rates increase borrowing costs for businesses and place pressure on net interest margins for banks and other finance companies. Our decision to be underweighted in the interest-sensitive segment of the financial sector across all Oakwood equity strategies has been beneficial to client portfolios, as this area has been depressed due to rising interest rates. The mortgage Real Estate Investment Trust (REIT) that we do own has minimal interest rate risk and extremely low balance sheet leverage. In addition, the one large bank we own is conservatively managed, and largely does not participate in the derivatives market, a major source of risk for most money center banks. The relative underweighting in this segment of the financial sector provides us with the flexibility to increase our exposure to this area, when we feel that the interest rate environment is more favorable to these types of companies.

During the third quarter, we continued to lighten up on energy holdings, as some of these stocks hit new highs. Oakwood’s clients were richly rewarded by being overweighted in energy stocks about 18 to 24 months ago, based on our analysis. After enjoying the benefits of their significant run-up, we reduced our position sizes. We believe downside risk and high price volatility are latent in energy stocks, and prefer to be underweighted in this area at this time. The week ended October 7, 2005, showed a 7.4% pullback in the price of crude and a similar tumble for energy stocks, after their remarkable run-up.

Our intensive search for undervalued growth and income stocks leads us to uncover investment gems in a variety of industries and sectors. Some examples are:

Consumer Cyclicals. Rarely do we find a company suitable for client portfolios in this industry; however, this restaurant stock has strong fundamentals and growth prospects that make it a standout. It is a well-run, high return on capital, high return on equity single-concept restaurant chain whose stock has been depressed by market negatives relating to the restaurant industry as a whole. It develops, franchises and operates casual dining restaurants located in 49 states and 12 countries outside the US. During 2004, the company launched a strategic alliance with Weight Watchers to offer Weight Watchers branded menu alternatives. The management owns 6.3% of its outstanding shares, and is very focused, innovative and shareholder oriented.

Consumer Staples. An excellent consumer staples company in client portfolios is the largest retailer in North America. Its low price leadership strategy in the US, continued expansion of its successful food business, additional refinements to its apparel selections, and inroads into international markets are key sales drivers. This company’s expansion plans in 2006 include 240 to 250 supercenters and 145 to 155 international stores. A continued emphasis on small business customers, while maintaining price leadership, should boost results in its membership warehouse division. The free cash flow generated by this company promises to provide superb shareholder returns.

Financials. We have owned this dominant business development company in the US middle acquisition market since 2002. It provides mezzanine and senior debt financing for buyouts led by private equity firms, and financing to smaller private and small public companies to fund growth, recapitalizations and acquisitions. Many of its equity investments provide capital gains potential. Investors are richly rewarded by its significant dividend, which has compounded at 9% the last five years. It is hard to find solid dividends that grow, and this company has developed years of future potential by moving into the European acquisition market this year.

We have scoured the mortgage and real estate markets for an outstanding REIT whose primary focus is investing in real estate by acquiring and owning securities backed by high-quality real estate loans, particularly jumbo residential loans within the US real estate markets. This company has a brilliant strategy which it executes extremely well, generating a base dividend of over 5%. This company is a significant player in the small jumbo mortgages industry, issuing non-recourse securitizations and retaining only the credit risk which they can manage. If there are disturbances in the mortgage markets, this company is well positioned with excess capital to invest when opportunity arises.

Healthcare. A healthcare company in Oakwood’s Capital Appreciation client portfolios is a dominant player in the wound-therapy industry, an industry with high barriers to entry. With its existing patents and innovative products which address a large under-penetrated market and wide coverage by third-party payers, this healthcare company should continue it prospects for 20+% top- and bottom-line growth. The company’s primary business is advanced wound care, and its lead product is a proprietary system that promotes wound healing. Its secondary business includes selling surfaces that promote wound healing. This generates substantial free cash flow and gives the company valuable access to hospital decision-makers.

We are pleased to hold these excellent and growing companies purchased at a value price in our client portfolios. For the remainder of 2005, we expect the stock market to provide more opportunities for us. When we find under priced quality companies, we buy them, otherwise, we wait. In this environment, we particularly like our substantial dividend income which gives us a virtually certain cash return even in the event of a market fall.