The Day Hagan Logix Tactical Dividend strategy (DHLTD) was roughly in line with its Russell 1000 Value benchmark for the month of August, up 0.77%* versus the Russell at 0.83%. Year to date, DHLTD is now +12.73%*, while holding a defensive cash position throughout 2019. All numbers are gross of fees and total return.
Based on our proprietary, objective valuation and screening process, we have held a portfolio weighting in cash, in varying degrees, throughout the past five years. This is because our process shows, overall, our eligible universe of equities as having extended valuations. In other words, while we hold stocks that we believe are vastly undervalued, there are just not enough of them to reduce our existing cash position. As we seek to be fully invested, holding cash at some level for a multi-year period is rare for us. However, the strategy is showing signals that are reminiscent of periods like 2002 and 2008.
We understand it is difficult (for you and for us) to be patient, holding cash, as the market continues to go higher. However, it is worth noting that, while taking substantial risk off the table with cash and via disciplined stock selection, we have been largely in line with our benchmark. Over the past five years (through 7/31/2019), we have returned +7.50% annually, which represents 94% of the Russell 1000 Value annualized returns. In hindsight, it’s fair to ask why the cash position needed to be held. The answer also comes from history. Our process has protected in extended market downturns, like 2002 (over 2300 basis points of outperformance vs. the Russell and over 2700 basis points of outperformance vs. the S&P 500) and 2008 (about 2000 basis points of outperformance vs. both indexes). More recently, our five-year performance, in addition to being ahead of the strategy’s historical upside capture, shows modest volatility with a beta of 0.79, in turn generating attractive alpha.
In August, our Airfreight & Logistics industry grouping led performance, returning over 7% during the month, led by United Parcel Service (UPS), up nearly 16% for the month. Similar to most other industries we buy at what we view as trough valuations, there has been a lot of noise around names like UPS and FedEx (FDX) that are both an overreaction and only one side of the story. In any case for our current holdings in this Airfreight & Logistics industry, the negative sentiment doesn’t impact our strategic perspective. While we follow a disciplined and data-driven process in valuation, it is worth noting a few dynamics providing tailwinds to the industry moving forward. Probably most significantly, e-commerce (and the need for shipping speed) is growing precipitously, at an annualized mid-teens rate. While Amazon is working to enhance its internal logistics capabilities (viewed as a threat), established companies like UPS and FDX are exceptionally well-positioned to take advantage of the bigger overall shipping pie. While there are growing pains in terms of new investment to handle the larger flow, technology and automation should ultimately serve to improve the bottom line. Granted, trade issues and related economic growth are near-term risks hitting the headlines on a daily basis. From a longer-term point of view, however, global trade growth remains a positive driver for the Airfreight & Logistics industry.
Speaking of buying stocks with negative sentiment around them, we purchased Regional Banks in late June. At the time, talk of the Fed cutting rates was at a fever pitch (rate cuts/lower rates are perceived as a negative for asset-sensitive banks that rely on the spread between deposit rates and lending rates). We are up over 7% in our bank stocks since that recent purchase, advancing about 5.7% in July. While this is not directly relevant to our yield valuation process, it is worth noting that domestic banks now offer higher dividend yields than utilities, an industry seen as a dividend income mainstay. It is largely reflective, given the inverse relationship between yield and price, of how hard many bank stocks have been hit, and in our view, selective banks’ upside potential.
As we look forward, we see a market fraught with a fair amount of uncertainty and risk. The weighting of a handful of technology stocks (the FANG stocks—Facebook, Amazon, Netflix, and Alphabet/Google—as well as Apple and Microsoft) has more than doubled in the Russell 1000 since 2012 to nearly 15% (source: Bloomberg). Is this a potential bubble with the downturn in any of these names? Broad, equal-weighted indexes of U.S. equities have been flat in 2019 versus the significant 2019 upswing in market cap weighted indexes like the S&P 500, an indication that positive price performance is focused on more narrow segments of the market. The economic expansion is now over ten years old, appearing to be the longest in U.S. history since records started over a century ago (source: National Bureau of Economic Research). For perspective, the average length of an expansion has been 48 months.
Put that and other, similar data points together, and what does it all mean for the markets and, more specifically, our strategy? We are not forecasting the direction of the market or trying to time it. Instead, we are consistently applying the same disciplined approach we always have. It tells us that the industries/equities we currently hold are vastly undervalued but that our overall, eligible universe is overvalued, leading us to hold defensive cash. As our track record has shown, we strongly believe our process will continue to lead to long-term outperformance with low volatility.
We would be more than happy to schedule a call or visit to discuss portfolio positioning in the current environment.
Robert Herman, MBA
Donald L. Hagan, CFA
Jeffrey Palmer, CIPM
Arthur S. Day
Steve Zimmerman, MBA
Print Copy of Article: Day Hagan Logix Tactical Dividend Strategy Update August 2019 (PDF)
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The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Indexes are unmanaged, fully invested, and cannot be invested in directly. The S&P 500® Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.
Disclosure: *Note that individuals’ percentage gains relative to those mentioned in this report may differ slightly due to portfolio size and other factors. The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Logix (DH Logix), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any DH Logix literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DH Logix, accounts that DH Logix or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DH Logix uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of DH Logix’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.