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Background:
BL-SH Investment Counsel, LLC ("BL-SH") utilizes a strategy that involves alternating between two different groups of securities (Asset Mix 1 and Asset Mix 2) based upon certain technical market indicators. The methodologies used are considered proprietary and the exact nature of BL-SH's technical trading model is not discussed within this report. BL-SH has asked Callan to calculate and analyze the performance and risk characteristics of BL-SH's strategy against the S&P 500 index and against Callan's Total Domestic Equity Database. To achieve this, we created two models. The first model (the "Technical Model") will replicate the strategy's decision rules, as they have been described to Callan by Mr. Larry Sobel of BL-SH, to create a series of transaction signals using historical index information. The second model (the "Valuation Model"), utilizing the signals of the first model, will invest in either Asset Mix 1 or Asset Mix 2. This report includes information and analysis through December 31, 2007.¹

Data and Methodology
is instructed to purchase a well diversified basket of small capitalization value securities (Asset Mix 1). For purposes of this study, Callan has utilized a well-established small capitalization value index, which is available in the marketplace as an investable product (open-ended mutual fund or Exchange-Traded Funds "ETFs", for example). During a sell signal, the investor is instructed to purchase an equal mixture of 5 different asset classes (Asset Mix 2) that exhibit a low correlation to the S&P 500 and each other.²

As with the buy signals, we have utilized well-established, publicly traded and open-ended mutual funds or ETFs.

The Valuation Model is used to calculate the monthly return series. To calculate performance, on the date of a signal (in this example, a buy signal) an investor would sell her complete position in the sell signal securities at the closing price³ for that day and buy (also at the closing price of the day) the buy signal security/securities.

Analysis
Over the historical time period (the "Simulation Period") examined (January 1987 to December 2007 – a total of 21 Years) the Technical Model began in the sell position and produced a total of three buy signals. Buy signals have been in place for a total of 46 months (18.3% of the total 252 months). The total cumulative return for the entire Simulation Period was 1596.0%, providing an average annual return of 14.43% with a standard deviation (based on quarterly returns) of 14.84%⁴. This performance compares favorably to the S&P 500, which had a cumulative return of 882.4%, an annualized return of 11.49% and a standard deviation of 15.53% over the same time period. Additional risk & return metrics include:

Alpha: 408 basis points;
Beta: 0.81; and
R-Squared: 0.71.

We have also provided a comparison of BL-SH's performance against a group of equity managers and a benchmark index over the last 21 years. At BL-SH's request, we have used Callan's Total Domestic Equity Database⁵ to compare the risk & return statistics⁶ of the BL-SH strategy using the S&P 500 as the benchmark. Against the comparison group of managers, the average annual return ranked in the 22nd percentile and the standard deviation ranked in the 82nd percentile.

With the S&P 500 as the benchmark, BL-SH's strategy produced an alpha over the past 21 years of 4.08% (per year), a beta of 0.81 with an R-Squared of 0.71. Against the comparison group, BL-SH's alpha ranked in the 16th percentile, the beta in the 89th and the R-Squared in the 68th percentile.

Attached are tables that show the return and risk characteristics of BL-SH's strategy against both Callan's Total Domestic Equity Database and against the S&P 500 over a number of historical time periods. Simulation results using BL-SH's strategy has produced returns and alpha over the past 10, 20 and 21 years (ended 12/31/07) that are in the top 50% of the comparison group of managers while maintaining a beta of less than 1.0 and a standard deviation less than that of the S&P 500.

Because past performance is not a guarantee of future performance, no comments in this letter should be construed as a recommendation by Callan Associates for or against BL-SH Investment Counsel, LLC.

Investment Counsel, LLC.
Sincerely,
Robert L. Shaw
Quantitative Consultant

¹ Callan has prepared similar analysis for Mr. Sobel for the time periods ended December 31, 1995, June 30, 2003 and years ended December 31, 2002 to 2006. Although the model formulas have remained constant, the results achieved in the 1995 analysis will differ from the following years because the baskets of securities purchased as a result of model buy and sell signals differ. In 2006, BL-SH made changes to the baskets of securities that are purchased.

² During 2006, BL-SH made a change to the securities that are purchased. Prior to March 2006, BL-SH purchased an equal weighted mix of 3 different asset classes. In April 2006, this was changed to a equal weighted mixture of 5 different assets classes.

³ The model is capable of producing "intraday" buy/sell signals. However, for this analysis, we used end-of-day signals and traded at closing prices.

⁴ The returns for the ETFs and/or mutual funds used for both the buy and sell securities were calculated using "Net of Fee" performance numbers. A typical open-ended mutual fund will have expense ratios between 10 (index replication) and 100 (full active management) basis points. Certain mutual funds may, now or in the future, be closed to new investors, which may require the use of different mutual funds than those used in the development of this analysis. An investor using different mutual funds should expect different results.

⁵ Callan's Total Equity Database is a broad collection of actively managed separate account equity products. This database is a "Gross of Fees" database and BL-SH's performance, relative to this database, would likely have improved if fees had been accounted for.

⁶ An appendix with definitions for all of the risk & return statistics used in this report is included.

Investment Performance

Callan Report

Callan Report Disclosures